Reports to Congress

101st Annual Report

2014

B O A R D O F G O V E R N O R S O F T H E F E D E R A L R E S E R V E S Y S T E M

101st Annual Report

2014

B O A R D O F G O V E R N O R S O F T H E F E D E R A L R E S E R V E S Y S T E M

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Letter of Transmittal

Board of Governors of the Federal Reserve System

Washington, D.C.

June 2015

The Speaker of the House of Representatives:

Pursuant to the requirements of section 10 of the Federal Reserve Act, I am pleased to submit the 101st annual

report of the Board of Governors of the Federal Reserve System.

This report covers operations of the Board during calendar year 2014.

Sincerely,

Janet L. Yellen

Chair

Overview

............. .............. .............. .............. . .............. .............. .............. ........................... ........ 1

About This Report ........ . .............. .............. .............. .............. .............. .............. .............. ............ 1

About the Federal Reserve System ............. .............. .............. .............. .............. .............. ........... 2

Monetary Policy and Economic Developments

............. .............. .............. .............. . .... 5

Monetary Policy Report of February 2015 .................... .............. .............. .............. .............. ........ 5

Monetary Policy Report of July 2014 ............. .............. .............. .............. .............. .............. ....... 22

Financial Stability

............. .............. .............. .............. . .............. .............. ........................... ... 37

Monitoring Risks to Financial Stability .................... .............. .............. ........................... ............. 38

Macroprudential Supervision of Large, Complex Financial Institutions ........ .............. .............. ..... 43

Domestic and International Cooperation and Coordination ........ .............. .............. .............. ........ 44

Supervision and Regulation

............. .............. .............. .............. . ........................... ............. 47

2014 Developments .................................. .............. .............. .............. .............. .............. .......... 47

Supervision ................ .............. .............. .............. .............. .............. .............. .............. ............ 49

Regulation ............... .............. . .............. ........................... .............. .............. .............. .............. . 71

Consumer and Community Affairs

............. .............. .............. .............. . .............. ........... 75

Supervision and Examinations .................. .............. .............. .............. .............. .............. ........... 75

Consumer Laws and Regulations ............................. .............. .............. .............. .............. .......... 86

Consumer Research and Emerging-Issues and Policy Analysis ......... .............. .............. .............. 88

Community Development ............. .............. .............. .............. .............. .............. .............. ......... 91

Federal Reserve Banks

............. .............. .............. .............. . .............. ........................... ......... 95

Federal Reserve Priced Services ............................. .............. .............. .............. .............. ........... 95

Currency and Coin .................... . .............. .............. ........................... .............. .............. ............ 98

Fiscal Agency and Government Depository Services ........... .............. .............. .............. .............. 99

Use of Federal Reserve Intraday Credit ............. .............. .............. .............. .............. .............. . 102

FedLine Access to Reserve Bank Services ..... .............. .............. .............. .............. .............. .... 102

Information Technology ................... .............. .............. ........................... .............. .............. ..... 103

Examinations of the Federal Reserve Banks ........................ .............. .............. .............. ........... 103

Income and Expenses .................. .............. .............. .............. .............. .............. .............. ....... 104

SOMA Holdings and Loans ............................. .............. .............. .............. .............. .............. ... 105

Federal Reserve Bank Premises ........................ .............. .............. .............. .............. .............. . 108

Pro Forma Financial Statements for Federal Reserve Priced Services ............. .............. ........... 109

Contents

Other Federal Reserve Operations

............. .............. .............. .............. .............. ............. 115

Regulatory Developments: Dodd-Frank Act Implementation ....................................... .............. . 115

The Board of Governors and the Government Performance and Results Act ............... . .............. 119

Record of Policy Actions of the Board of Governors

............. .............. .............. .... 121

Rules and Regulations ................ .............. .............. .............. .............. .............. .............. ......... 121

Policy Statements and Other Actions ................... .............. .............. .............. .............. ............ 125

Discount Rates for Depository Institutions in 2014 ............ .............. .............. .............. .............. 126

Minutes of Federal Open Market Committee Meetings

............. .............. .............. 129

Meeting Held on January 28–29, 2014 ... . .............. .............. .............. ........................... ............. 130

Meeting Held on March 18–19, 2014 ............ .............. .............. .............. .............. .............. ...... 149

Meeting Held on April 29–30, 2014 ........ .............. .............. .............. ........................... .............. 174

Meeting Held on June 17–18, 2014 ..................... .............. .............. .............. .............. ............. 184

Meeting Held on July 29–30, 2014 ........... .............. .............. .............. .............. .............. .......... 210

Meeting Held on September 16–17, 2014 ................. .............. .............. .............. .............. ........ 222

Meeting Held on October 28–29, 2014 ................... . .............. .............. ........................... .......... 248

Meeting Held on December 16–17, 2014 ........................ . .............. .............. .............. .............. . 261

Litigation

............. .............. .............. ...........

............. .............. .............. .............. .............. ........ 285

Statistical Tables

............. .............. .............. .............. . .............. .............. .............. .................. 287

Federal Reserve System Audits

............. .............. .............. .............. .............. .............. ..... 317

Board of Governors Financial Statements ............ .............. .............. ........................... .............. 318

Federal Reserve Banks Combined Financial Statements ................ . .............. ........................... . 340

Office of Inspector General Activities ........ .............. .............. . ........................... .............. .......... 398

Government Accountability Office Reviews ...... .............. .............. .............. .............. .............. ... 399

Federal Reserve System Budgets

............. .............. .............. .............. .............. .............. .. 401

System Budgets Overview .............. .............. .............. .............. .............. .............. .............. ..... 401

Board of Governors Budgets ................. .............. .............. .............. .............. .............. ............ 404

Federal Reserve Banks Budgets ..... .............. .............. .............. .............. .............. .............. ..... 408

Currency Budget .................... .............. .............. .............. .............. .............. .............. ............. 412

Federal Reserve System Organization

............. .............. .............. .............. .............. ...... 417

Board of Governors ............ .............. .............. .............. .............. .............. .............. .............. ... 417

Federal Open Market Committee ..... .............. . .............. .............. ........................... .............. .... 422

Board of Governors Advisory Councils ............. .............. .............. .............. .............. .............. .. 424

Federal Reserve Banks and Branches ........................... .............. .............. .............. .............. ... 427

Index

............. .............. .............. .............. . .............. .............. .............. .............. .............. ........... 443

Overview

The Federal Reserve, the central bank of the United

States, is a federal system composed of a central gov-

ernmental agency—the Board of Governors—and

12 regional Federal Reserve Banks.

The Board of Governors, located in Washington,

D.C., consists of seven members appointed by the

President of the United States and supported by a

2,745-person staff. Besides conducting research,

analysis, and policymaking related to domestic and

international financial and economic matters, the

Board plays a major role in the supervision and regu-

lation of U.S. financial institutions and activities, has

broad oversight responsibility for the nation’s pay-

ments system and the operations and activities of the

Federal Reserve Banks, and plays an important role

in promoting consumer protection, fair lending, and

community development.

About This Report

This report covers Board and System operations and

activities during calendar-year 2014. The report

includes the following sections:

•

Monetary policy and economic developments.

Section 2 provides adapted versions of the Board’s

semiannual monetary policy reports to Congress.

•

Federal Reserve operations.

Section 3 provides a

summary of Board and System activities in the

areas of financial stability policy and research;

sec-

tion 4

, in supervision and regulation; section 5, in

consumer and community affairs; and

section 6, in

Reserve Bank operations.

•

Dodd-Frank Act implementation and other require-

ments.

Section 7 summarizes the Board’s efforts in

2014 to implement provisions of the Dodd-Frank

Wall Street Reform and Consumer Protection Act

as well as the Board’s compliance with the Govern-

ment Performance and Results Act of 1993.

•

Policy actions and litigation.

Section 8 and

section 9 provide accounts of policy actions taken

by the Board in 2014, including new or amended

rules and regulations and other actions as well as

the deliberations and decisions of the Federal Open

Market Committee (FOMC);

section 10 summa-

rizes litigation involving the Board.

•

Statistical tables.

Section 11 includes 14 statistical

tables that provide updated historical data concern-

ing Board and System operations and activities.

•

Federal Reserve System audits.

Section 12 provides

detailed information on the several levels of audit

and review conducted in regards to System opera-

tions and activities, including those provided by

outside auditors and the Board’s Office of Inspec-

tor General.

•

Federal Reserve System budgets.

Section 13 presents

information on the 2014 budget performance of

the Board and Reserve Banks, as well as their 2015

budgets, budgeting processes, and trends in their

expenses and employment.

•

Federal Reserve System organization.

Section 14

provides listings of key officials at the Board and in

the Federal Reserve System, including the Board of

For more information on the FOMC, see the Board’s website at

www.federalreserve.gov/monetarypolicy/fomc.htm.

For More Background on

Board Operations

For more information about the Federal Reserve

Board and the Federal Reserve System, visit the

Board’s website at

www.federalreserve.gov/

aboutthefed/default.htm

. An online version of this

annual report is available at

www.federalreserve.gov/

publications/annual-report/default.htm

Governors, its officers, FOMC members, several

System councils, and Federal Reserve Bank and

Branch officers and directors.

About the Federal Reserve System

The Federal Reserve System, which serves as the

nation’s central bank, was created by an act of Con-

gress on December 23, 1913. The System consists of

a seven-member Board of Governors with headquar-

ters in Washington, D.C., and the 12 Reserve Banks

located in major cities throughout the United States.

The Federal Reserve Banks are the operating arms of

the central banking system, carrying out a variety of

System functions, including operating a nationwide

payment system; distributing the nation’s currency

and coin; under authority delegated by the Board of

Governors, supervising and regulating a variety of

financial institutions and activities; serving as fiscal

agents of the U.S. Treasury; and providing a variety

of financial services for the Treasury, other govern-

ment agencies, and other fiscal principals.

The following maps identify Federal Reserve Dis-

tricts by their official number, city, and letter

designation.

■ Federal Reserve Bank city

■

Board of Governors of the Federal Reserve System, Washington, D.C.

2 101st Annual Report | 2014

■ Federal Reserve Bank city

● Federal Reserve Branch city

■

Board of Governors of the Federal Reserve System, Washington, D.C.

— Branch boundary

Overview 3

Monetary Policy and

Economic Developments

As required by section 2B of the Federal Reserve Act,

the Federal Reserve Board submits written reports to

the Congress that contain discussions of “the con-

duct of monetary policy and economic developments

and prospects for the future.” The Monetary Policy

Report, submitted semiannually to the Senate Com-

mittee on Banking, Housing, and Urban Affairs and

to the House Committee on Banking and Financial

Services, is delivered concurrently with testimony

from the Federal Reserve Board Chair.

The following discussion is a review of U.S. monetary

policy and economic developments in 2014, excerpted

from the Monetary Policy Reports published in Feb-

ruary 2015 and July 2014. Those complete reports

are available on the Board’s website at

www

.federalreserve.gov/monetarypolicy/files/20150224_

mprfullreport.pdf

(February 2015) and www

.federalreserve.gov/monetarypolicy/files/20140715_

mprfullreport.pdf

(July 2014).

Other materials in this annual report related to the

conduct of monetary policy can be found in

sec-

tion 9

, “Minutes of Federal Open Market Committee

Meetings,” and

section 11, “Statistical Tables” (see

tables 1–4).

Monetary Policy Report

of February 2015

Summary

The labor market improved further during the second

half of last year and into early 2015, and labor mar-

ket conditions moved closer to those the Federal

Open Market Committee (FOMC) judges consistent

with its maximum employment mandate. Since the

middle of last year, monthly payrolls have expanded

by about 280,000, on average, and the unemployment

rate has declined nearly ½ percentage point on net.

Nevertheless, a range of labor market indicators sug-

gest that there is still room for improvement. In par-

ticular, at 5.7 percent, the unemployment rate is still

above most FOMC participants’ estimates of its

longer-run normal level, the labor force participation

rate remains below most assessments of its trend, an

unusually large number of people continue to work

part time when they would prefer full-time employ-

ment, and wage growth has continued to be slow.

A steep drop in crude oil prices since the middle of

last year has put downward pressure on overall infla-

tion. As of December 2014, the price index for per-

sonal consumption expenditures was only ¾ percent

higher than a year earlier, a rate of increase that is

well below the FOMC’s longer-run goal of 2 percent.

Even apart from the energy sector, price increases

have been subdued. Indeed, the prices of items other

than food and energy products rose at an annual rate

of only about 1 percent over the last six months of

2014, noticeably less than in the first half of the year.

The slow pace of price increases during the second

half was likely associated, in part, with falling import

prices and perhaps also with some pass-through of

lower oil prices. Survey-based measures of longer-

term inflation expectations have remained stable;

however market-based measures of inflation com-

pensation have declined since last summer.

Economic activity expanded at a strong pace in the

second half of last year. Notably reflecting solid

gains in consumer spending, real gross domestic

product (GDP) is estimated to have increased at an

annual rate of 3¾ percent after a reported increase of

just 1¼ percent in the first half of the year. The

growth in GDP was supported by accommodative

monetary policy, a reduction in the degree of

restraint imparted by fiscal policy, and the increase in

households’ purchasing power arising from the drop

in oil prices. The gains in GDP have occurred despite

continued sluggish growth abroad and a sizable

appreciation of the U.S. dollar, both of which have

weighed on net exports.

Financial conditions in the United States have gener-

ally remained supportive of economic growth.

Longer-term interest rates in the United States and

other advanced economies have continued to move

down, on net, since the middle of 2014 amid disap-

pointing economic growth and low inflation abroad

as well as the associated anticipated and actual mon-

etary policy actions by foreign central banks. Broad

indexes of U.S. equity prices have risen moderately,

on net, since the end of June. Credit flows to nonfi-

nancial businesses largely remained solid in the sec-

ond half of last year. Overall borrowing conditions

for households eased further, but mortgage lending

standards are still tight for many potential borrowers.

The vulnerability of the U.S. financial system to

financial instability has remained moderate, primarily

reflecting low-to-moderate levels of leverage and

maturity transformation. Asset valuation pressures

have eased a little, on balance, but continue to be

notable in some sectors. The capital and liquidity

positions of the banking sector have improved fur-

ther. Over the second half of 2014, the Federal

Reserve and other agencies finalized or proposed sev-

eral more rules related to the Dodd-Frank Wall Street

Reform and Consumer Protection Act of 2010,

which were designed to further strengthen the resil-

ience of the financial system.

At the time of the FOMC meeting in late January of

this year, the Committee saw the outlook as broadly

similar to that at the time of its December meeting,

when the most recent Summary of Economic Projec-

tions (SEP) was compiled. (The December SEP is

included as

Part 3 of the February 2015 Monetary

Policy Report on pages 39–52; it is also included in

section 9 of this annual report.) The FOMC expects

that, with appropriate monetary policy accommoda-

tion, economic activity will expand at a moderate

pace, and that labor market indicators will continue

to move toward levels the Committee judges consis-

tent with its dual mandate of maximum employment

and price stability. In addition, the Committee con-

tinues to see the risks to the outlook for economic

activity and the labor market as nearly balanced.

Inflation is anticipated to decline further in the near

term, mainly reflecting the pass-through of lower oil

prices to consumer energy prices. However, the Com-

mittee expects inflation to rise gradually toward its

2 percent longer-run objective over the medium term

as the labor market improves further and the transi-

tory effects of lower energy prices and other factors

dissipate.

At the end of October, and after having made further

measured reductions in the pace of its asset pur-

chases at its July and September meetings, the

FOMC concluded the asset purchase program that

began in September 2012. The decision to end the

purchase program reflected the substantial improve-

ment in the outlook for the labor market since the

program’s inception—the stated aim of the asset pur-

chases—and a judgment that the underlying strength

of the broader economy was sufficient to support

ongoing progress toward the Committee’s policy

objectives.

Nonetheless, the Committee continued to judge that

a high degree of policy accommodation remained

appropriate. As a result, the FOMC has maintained

the exceptionally low target range of 0 to ¼ percent

for the federal funds rate and kept the Federal

Reserve’s holdings of longer-term securities at sizable

levels. The Committee has also continued to provide

forward guidance bearing on the anticipated path of

the federal funds rate. In particular, the FOMC has

stressed that in deciding how long to maintain the

current target range, it will consider a broad set of

indicators to assess realized and expected progress

toward its objectives. On the basis of its assessment,

the Committee indicated in its two most recent post-

meeting statements that it can be patient in beginning

to normalize the stance of monetary policy.

To further emphasize the data-dependent nature of

its policy stance, the FOMC has stated that if incom-

ing information indicates faster progress toward its

policy objectives than the Committee currently

expects, increases in the target range for the federal

funds rate will likely occur sooner than the Commit-

tee anticipates. The FOMC has also indicated that in

the case of slower-than-expected progress, increases

in the target range will likely occur later than cur-

rently anticipated. Moreover, the Committee contin-

ues to expect that, even after employment and infla-

tion are near mandate-consistent levels, economic

conditions may, for some time, warrant keeping the

target federal funds rate below levels the Committee

views as normal in the longer run.

As part of prudent planning, the Federal Reserve has

continued to prepare for the eventual normalization

of the stance and conduct of monetary policy. The

FOMC announced updated principles and plans for

the normalization process following its September

meeting and has continued to test the operational

readiness of its monetary policy tools. The Commit-

tee remains confident that it has the tools it needs to

raise short-term interest rates when doing so becomes

appropriate, despite the very large size of the Federal

Reserve’s balance sheet.

6 101st Annual Report | 2014

Part 1: Recent Economic and Financial

Developments

The labor market continued to improve in the second

half of last year and early this year. Job gains have

averaged close to 280,000 per month since June, and

the unemployment rate fell from 6.1 percent in June

to 5.7 percent in January. Even so, the labor market

likely has not yet fully recovered, and wage growth

has remained slow. Since June, a steep drop in crude

oil prices has exerted downward pressure on overall

inflation, and non-energy price increases have been

subdued as well. The price index for personal con-

sumption expenditures (PCE) increased only ¾ per-

cent during the 12 months ending in December, a

rate that is well below the Federal Open Market

Committee’s (FOMC) longer-run objective of 2 per-

cent; the index excluding food and energy prices was

up 1¼ percent over this period. Survey measures of

longer-run inflation expectations have been stable,

but measures of inflation compensation derived from

financial market quotes have moved down. Mean-

while, real gross domestic product (GDP) increased

at an estimated annual rate of 3¾ percent in the sec-

ond half of the year, up from a reported rate of just

1¼ percent in the first half. The growth in GDP has

been supported by accommodative monetary policy

and generally favorable financial conditions, the

boost to households’ purchasing power from lower

oil prices, and improving consumer and business con-

fidence. However, housing market activity has been

advancing only slowly, and sluggish growth abroad

and the higher foreign exchange value of the dollar

have weighed on net exports. Longer-term interest

rates in the United States and other advanced econo-

mies declined, on net, amid disappointing growth

and low inflation abroad and the associated actual

and anticipated accommodative monetary policy

actions by foreign central banks.

Domestic Developments

The labor market has strengthened further . . .

Employment rose appreciably and the unemployment

rate fell in the second half of 2014 and early this year.

Payroll employment has increased by an average of

about 280,000 per month since June, almost 40,000

faster than in the first half of last year (

figure 1). The

gain in payroll employment for 2014 as a whole was

the largest for any year since 1999. In addition, the

unemployment rate continued to move down, declin-

ing from 6.1 percent in June to 5.7 percent in January

of this year, a rate more than 4 percentage points

below its peak in 2009. Furthermore, a substantial

portion of the decline in unemployment over the past

year came from a decrease in the number of indi-

viduals reporting unemployment spells longer than

six months.

The labor force participation rate has been roughly

flat since late 2013 after having declined not only dur-

ing the recession, but also during much of the recov-

ery period when most other indicators of labor mar-

ket health were improving. While much of that

decline likely reflected ongoing demographic

trends—such as the aging of members of the baby-

boom generation into their retirement years—some

of the decline likely reflected workers’ perceptions of

poor job opportunities. Judged against the backdrop

of a declining trend, the recent stability of the par-

ticipation rate likely represents some cyclical

improvement. Nevertheless, the participation rate

remains lower than would be expected given the

unemployment rate, and thus it continues to suggest

more cyclical weakness than is indicated by the

unemployment rate.

Another sign that the labor market remains weaker

than indicated by the unemployment rate alone is the

still-elevated share of workers who are employed part

time but would like to work full time. This share of

involuntary part-time employees has generally shown

less improvement than the unemployment rate over

the past few years; in part for this reason, the more

comprehensive U-6 measure of labor underutiliza-

tion remains quite elevated (

figure 2).

Nevertheless, most broad measures of labor market

health have improved. With employment rising

and the participation rate holding steady, the

Figure 1. Net change in payroll employment

Total nonfarm

Private

800

600

400

200

400

Thousands of jobs

20152014201320122011201020092008

3-month moving averages

Source: Department of Labor, Bureau of Labor Statistics.

Monetary Policy and Economic Developments 7

employment-to-population ratio climbed noticeably

higher in 2014 and early 2015 after having moved

more or less sideways for much of the recovery. The

quit rate, which is often perceived as a measure of

worker confidence in labor market opportunities, has

largely recovered to its pre-recession level. Moreover,

an index constructed by Federal Reserve Board staff

that aims to summarize movements in a wide array of

labor market indicators also suggests that labor mar-

ket conditions strengthened further in 2014, and that

the gains have been quite strong in recent months.

. . . while gains in compensation have been

modest . . .

Even as the labor market has been improving, most

measures of labor compensation have continued to

show only modest gains. The employment cost index

(ECI) for private industry workers, which measures

both wages and the cost of employer-provided ben-

efits, rose 2¼ percent over the 12 months ending in

December, only slightly faster than the gains of

about 2 percent that had prevailed for several years.

Two other prominent measures of compensation—

average hourly earnings and business-sector compen-

sation per hour—increased slightly less than the ECI

over the past year and have shown fewer signs of

acceleration. Over the past five years, the gains in all

three of these measures of nominal compensation

have fallen well short of their pre-recession averages

and have only slightly outpaced inflation. That said,

the drop in energy prices has pushed up real wages in

recent months.

. . . and productivity growth has been lackluster

Over time, increases in productivity are the central

determinant of improvements in living standards.

Labor productivity in the private business sector has

increased at an average annual pace of 1¼ percent

since the recession began in late 2007. This pace is

close to the average that prevailed between the mid-

1970s and the mid-1990s, but it is well below the pace

of the earlier post–World War II period and the

period from the mid-1990s to the eve of the financial

crisis. In recent years, productivity growth has been

For details on the construction of the labor market conditions

index, see Hess Chung, Bruce Fallick, Christopher Nekarda,

and David Ratner (2014), “Assessing the Change in Labor Mar-

ket Conditions,” Finance and Economics Discussion Series

2014-109 (Washington: Board of Governors of the Federal

Reserve System, December),

www.federalreserve.gov/

econresdata/feds/2014/files/2014109pap.pdf

Figure 2. Measures of labor underutilization

U-5

U-4

U-6

Percent

2015201320112009200720052003

Monthly

Unemployment rate

Note: U-4 measures total unemployed plus discouraged workers, as a percent of the labor force plus discouraged workers. Discouraged workers are a subset of marginally

attached workers who are not currently looking for work because they believe no jobs are available for them. U-5 measures total unemployed plus all marginally attached to the

labor force, as a percent of the labor force plus persons marginally attached to the labor force. Marginally attached workers are not in the labor force, want and are available for

work, and have looked for a job in the past 12 months. U-6 measures total unemployed plus all marginally attached workers plus total employed part time for economic rea-

sons, as a percent of the labor force plus all marginally attached workers. The shaded bar indicates a period of business recession as defined by the National Bureau of Eco-

nomic Research.

Source: Department of Labor, Bureau of Labor Statistics.

8 101st Annual Report | 2014

held down by, among other factors, the sharp drop in

businesses’ capital expenditures over the recession

and the moderate recovery in expenditures since

then. Productivity gains may be better supported in

the future as investment continues to strengthen.

A plunge in crude oil prices has held down

consumer prices . . .

As discussed in the box “

The Effect of the Recent

Decline in Oil Prices on Economic Activity

” on pages

8–9 of the February 2015 Monetary Policy Report,

crude oil prices have plummeted since June 2014 (

fig-

ure 3

). This sharp drop has caused overall consumer

price inflation to slow, mainly due to falling gasoline

prices: The national average of retail gasoline prices

moved down from about $3.75 per gallon in June to

about $2.20 per gallon in January. Crude oil prices

have turned slightly higher in recent weeks, and

futures markets suggest that prices are expected to

edge up further in coming years; nevertheless, oil

prices are still expected to remain well below the lev-

els that had prevailed through last June.

Over the past six months, increases in food prices

have moderated. Consumer food price increases had

been somewhat elevated in early 2014 as a result of

rising food commodity prices, but those commodity

prices have since eased, and increases at the retail

level have slowed accordingly.

. . . but even outside of the energy and food

categories, inflation has remained subdued

Inflation for items other than food and energy (so-

called core inflation) remains modest. Core PCE

prices rose at an annual rate of only about 1 percent

over the last six months of 2014 after having risen at

a 1¾ percent rate in the first half of the year; for

2014 as a whole, core PCE prices were up a little

more than 1¼ percent (

figure 4). The trimmed mean

PCE price index, an alternative indicator of underly-

ing inflation constructed by the Federal Reserve

Bank of Dallas, also increased more slowly in the sec-

ond half of last year. Falling import prices likely held

down core inflation in the second half of the year;

lower oil prices, and easing prices for commodities

more generally, may have played a role as well. In

addition, ongoing resource slack has reinforced the

low-inflation environment, though with the improv-

ing economy, downward pressure from this factor is

likely waning.

Looking at the overall basket of items that people

consume, price increases remain muted and below

the FOMC’s longer-run objective of 2 percent. In

December, the PCE price index was only ¾ percent

above its level from a year earlier. With retail surveys

showing a further sharp decline in gasoline prices in

January, overall consumer prices likely moved lower

early this year.

Survey-based measures of longer-term inflation

expectations have remained stable, while

market-based measures of inflation

compensation have declined

The Federal Reserve tracks indicators of inflation

expectations because such expectations likely factor

into wage- and price-setting decisions and so influ-

ence actual inflation. Survey-based measures of

longer-term inflation expectations, including surveys

of both households and professional forecasters, have

Figure 3. Brent spot and futures prices

Spot price

100

110

120

130

140

Dollars per barrel

20152014201320122011

Daily

Dec. 2017 futures contracts

Source: NYMEX.

Figure 4. Change in the chain-type price index for personal

consumption expenditures

Excluding food

and energy

Percent

2014201320122011201020092008

Monthly

Total

Note: The data extend through December 2014; changes are from one year

earlier.

Source: Department of Commerce, Bureau of Economic Analysis.

Monetary Policy and Economic Developments 9

been quite stable over the past 15 years; in particular,

they have changed little, on net, over the past few

years (

figure 5). In contrast, measures of longer-term

inflation compensation derived from financial market

instruments have fallen noticeably during the past

several months. As is discussed in more detail in the

box “

Challenges in Interpreting Measures of Longer-

Term Inflation Expectations

” on pages 12–13 of the

February 2015 Monetary Policy Report, deducing the

sources of changes in inflation compensation is diffi-

cult because such movements may be caused by fac-

tors other than shifts in market participants’ inflation

expectations.

Economic activity expanded at a strong pace in

the second half of 2014

Real GDP is estimated to have increased at an annual

rate of 3¾ percent in the second half of last year

after a reported increase of just 1¼ percent in the

first half, when output was likely restrained by severe

weather and other transitory factors (

figure 6). Pri-

vate domestic final purchases—a measure of house-

hold and business spending that tends to exhibit less

quarterly variation than GDP—also advanced at a

substantial pace in the second half of last year.

The second-half gains in GDP reflected solid

advances in consumer spending and in business

investment spending on equipment and intangibles

(E&I) as well as subdued gains for both residential

investment and nonresidential structures. More gen-

erally, the growth in GDP has been supported by

accommodative financial conditions, including

declines in the cost of borrowing for many house-

holds and businesses; by a reduction in the restraint

from fiscal policy relative to 2013; and by increases in

spending spurred by continuing job gains and, more

recently, by falling oil prices. The gains in GDP have

occurred despite an appreciating U.S. dollar and con-

cerns about global economic growth, which remain

an important source of uncertainty for the economic

outlook.

Consumer spending was supported by

continuing improvement in the labor market and

falling oil prices, . . .

Real PCE rose at an annual rate of 3¾ percent in the

second half of 2014—a noticeable step-up from the

sluggish rate of only about 2 percent in the first half

(

figure 7). The increases in spending have been sup-

ported by the improving labor market. In addition,

the fall in gasoline and other energy prices has

boosted purchasing power for consumers, especially

those in lower- and middle-income brackets who

spend a sizable share of their income on gasoline.

Real disposable personal income—that is, income

after taxes and adjusted for price changes—rose

3 percent at an annual rate in the second half of last

year, roughly double the average rate recorded over

the preceding five years.

. . . further increases in household wealth and

low interest rates, . . .

Consumer spending growth was also likely supported

by further increases in household net worth, as the

stock market continued to rise and house prices

moved up in the second half of last year. The value

Figure 5. Median inflation expectations

Michigan survey expectations

for next 5 to 10 years

Percent

20152013201120092007200520032001

SPF expectations

for next 10 years

Note: The Michigan survey data are monthly and extend through February 2015.

The SPF data for inflation expectations for personal consumption expenditures are

quarterly and extend from 2007:Q1 through 2015:Q1.

Source: University of Michigan Surveys of Consumers; Survey of Professional

Forecasters (SPF).

Figure 6. Change in real gross domestic product, gross

domestic income, and private domestic final purchases

Percent, annual rate

2014201320122011201020092008

H2*

Gross domestic product

Gross domestic income

Private domestic final purchases

* Gross domestic income is not yet available for 2014:H2.

Source: Department of Commerce, Bureau of Economic Analysis.

10 101st Annual Report | 2014

of corporate equities rose about 10 percent in 2014,

on top of the 30 percent gain seen in 2013. Although

the gains in house prices slowed last year—for

example, the CoreLogic national index increased only

5 percent after having risen more substantially in

2012 and 2013—these gains affected a larger share of

the population than did the gains in equities, as more

individuals own homes than own stocks (

figure 8).

Reflecting increases in home and equity prices, aggre-

gate household net wealth has risen appreciably from

its levels during the recession and its aftermath to

more than six times the value of disposable

personal income.

Coupled with low interest rates, the rise in incomes

has lowered debt payment burdens for many house-

holds. The household debt service ratio—that is, the

ratio of required principal and interest payments on

outstanding household debt to disposable personal

income—has remained at a very low level by histori-

cal standards.

. . . and increased credit availability for

consumers

Consumer credit continued to expand through late

2014, as auto and student loans have remained avail-

able even to borrowers with lower credit scores. In

addition, credit cards have become somewhat more

accessible to individuals on the lower end of the

credit spectrum, and overall credit card debt

increased moderately last year.

Consumer confidence has moved up

Consistent with the improvement in the labor market

and the fall in energy prices, indicators of consumer

sentiment moved up noticeably in the second half of

last year. The University of Michigan Surveys of

Consumers’ index of consumer sentiment—which

incorporates households’ views about their own

financial situations as well as broader economic con-

ditions—has moved up strongly, on net, in recent

months and is now close to its long-run average. The

Michigan survey’s measure of households’ expecta-

tions of real income changes in the year ahead has

also continued to trend up over the past several

months, perhaps reflecting the fall in gasoline prices.

However, this measure remains substantially below

its historical average and suggests a more guarded

outlook than the headline sentiment index.

However, the pace of homebuilding has improved

only slowly

After advancing reasonably well in 2012 and early

2013, the recovery in residential construction activity

has slowed markedly. Single-family housing starts

only edged up in 2014, and multifamily construction

Figure 7. Change in real personal consumption

expenditures and disposable personal income

Percent, annual rate

2014201320122011201020092008

Personal consumption expenditures

Disposable personal income

Source: Department of Commerce, Bureau of Economic Analysis.

Figure 8. Prices of existing single-family houses

CoreLogic

price index

S&P/Case-Shiller

national index

100

Peak = 100

2014201120082005

Monthly

Zillow

index

Note: The data for the Zillow and S&P/Case-Shiller indexes extend through

November 2014. The data for the CoreLogic index extend through Decem-

ber 2014. Each index has been normalized so that its peak is 100. The CoreLogic

price index includes purchase transactions only and is adjusted by Federal

Reserve Board staff. The S&P/Case-Shiller index reflects all arm’s-length sales

transactions nationwide.

Source: The S&P/Case-Shiller U.S. National Home Price Index (“Index”) is a prod-

uct of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for

tion, reproduction and/or photocopying in whole or in part are prohibited without

written permission of S&P Dow Jones Indices LLC. For more information on any of

S&P Dow Jones Indices LLC’s indices please visit www.spdji.com. S&P® is a reg-

istered trademark of Standard & Poor’s Financial Services LLC and Dow Jones®

is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P

Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor

their third party licensors make any representation or warranty, express or

implied, as to the ability of any index to accurately represent the asset class or

market sector that it purports to represent and neither S&P Dow Jones Indices

LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licen-

sors shall have any liability for any errors, omissions, or interruptions of any index

or the data included therein.

Monetary Policy and Economic Developments 11

activity was also little changed (figure 9). And sales

of both new and existing homes were flat, on net, last

year. In all, real residential investment rose only

2½ percent in 2014, and it remains well below its pre-

recession peak. The weak recovery in construction

likely relates to the rate of household formation,

which, notwithstanding tentative signs of a recent

pickup, has generally stayed very low despite the

improvement in the labor market.

Lending policies for home purchases remained tight

overall, although there are some indications that

mortgage credit has started to become more widely

accessible. Over the course of 2014, the fraction of

home-purchase mortgages issued to borrowers with

credit scores on the lower end of the spectrum edged

up. Additionally, in the Senior Loan Officer Opinion

Survey on Bank Lending Practices (SLOOS), several

large banks reported having eased lending standards

on prime home-purchase loans in the third and

fourth quarters of last year.

In January, the Federal

Housing Administration reduced its mortgage insur-

ance premiums by about one-third of the level that

had prevailed during the past four years—a step that

may lower the cost of credit for households with

small down payments and low credit scores. Even so,

mortgages have remained difficult to obtain for many

households.

Meanwhile, for borrowers who can qualify for a

mortgage, the cost of credit is low. After rising appre-

ciably around mid-2013, mortgage interest rates have

since retraced much of those increases. The 30-year

fixed mortgage rate declined roughly 60 basis points

in 2014, and it has edged down further, on net, this

year to a level not far from its all-time low in 2012.

Likely related to the most recent decline in mortgage

rates, refinancing activity rose modestly in January.

Overall business investment has moved up, but

investment in the energy sector is starting to be

affected by the drop in oil prices

Business fixed investment rose at an annual rate of

5¼ percent in the second half of 2014, close to the

rate of increase seen in the f irst half. Spending on

E&I capital rose at an annual rate of about 6 percent,

while spending on nonresidential structures moved

up about 4 percent (

figure 10). Business investment

has been supported by strengthening final demand as

well as by low interest rates and generally accommo-

dative financial conditions. Regarding nonresidential

structures, vacancy rates for existing properties have

been declining, and financing conditions for new

construction have eased further—both factors that

bode well for future construction. More recently,

however, the steep decline in the number of drilling

rigs in operation suggests that a sharp falloff in the

drilling and mining component of investment in non-

residential structures may be under way.

Corporate financing conditions were generally

favorable

The financial condition of large nonfinancial firms

generally remained solid in the second half of last

year; profitability stayed high, and default rates on

nonfinancial corporate bonds were generally very

low. Nonfinancial firms have continued to raise funds

The SLOOS is available on the Board’s website at www

.federalreserve.gov/boarddocs/snloansurvey

Figure 9. Private housing starts and permits

Multifamily starts

Single-family

permits

1.0

1.4

1.8

2.2

Millions of units, annual rate

20152013201120092007200520032001

Monthly

Single-family starts

Source: Department of Commerce, Bureau of the Census.

Figure 10. Change in real business fixed investment

Percent, annual rate

20142013201220112010200920082007

H1 H2

Structures

Equipment and intangible capital

Source: Department of Commerce, Bureau of Economic Analysis.

12 101st Annual Report | 2014

through capital markets at a robust pace, given sturdy

corporate credit quality, historically low interest rates

on corporate bonds, and highly accommodative lend-

ing conditions for most firms. Bond issuance by

investment-grade nonfinancial firms, and syndicated

lending to those fir ms, have both been particularly

strong. However, speculative-grade issuance in those

markets, which had remained elevated for most of

2014, diminished late in the year, because volatility

increased and spreads widened and perhaps also

because of greater scrutiny by regulators of syndi-

cated leveraged loans with weaker credit quality and

lower repayment capacity.

Credit also was readily available to most bank-

dependent businesses. According to the October 2014

and January 2015 SLOOS reports, banks generally

continued to ease price and nonprice terms on com-

mercial and industrial (C&I) loans to firms of all

sizes in the second half of 2014. That said, in the

fourth quarter, several banks reported having tight-

ened lending policies for oil and gas firms or, more

broadly, in response to legislative, supervisory, or

accounting changes. In addition, although overall

C&I loans on banks’ books registered substantial

increases in the second half of 2014, loans to busi-

nesses in amounts of $1 million or less—a proxy for

lending to small businesses—increased only modestly.

The weak growth in these small loans appears largely

due to sluggish demand; however, bank lending stan-

dards to small businesses are still reportedly some-

what tighter than the midpoint of their range over

the past decade despite considerable loosening over

the past few years.

Net exports held down second-half real GDP

growth slightly

Exports increased at a modest pace in the second half

of 2014, held back by lackluster growth abroad as

well as the appreciation of the dollar. Import growth

was also relatively subdued, despite the impetus from

the stronger dollar, and was well below the pace

observed in the first half (

figure 11). All told, real net

trade was a slight drag on real GDP growth in the

second half of 2014.

The current account deficit was little changed in the

third quarter of 2014 and, at 2¼ percent of nominal

GDP, was near its narrowest reading since the late

1990s. The current account deficit in the first three

quarters of 2014 was financed mainly by purchases

of Treasury and corporate securities by foreign pri-

vate investors. In contrast, the pace of foreign official

purchases in the first three quarters of the year was

the slowest in more than a decade, reflecting a signifi-

cant slowdown in reserve accumulation by emerging

market economies (EMEs).

Federal fiscal policy was less of a drag

on GDP . . .

Fiscal policy at the federal level had been a factor

restraining GDP growth for several years, especially

in 2013. In 2014, however, the contractionary effects

of tax and spending changes eased appreciably as the

restraining effects of the 2013 tax increases abated

and there was a slowing in the declines in federal pur-

chases due to sequestration and the Budget Control

Act of 2011 (

figure 12). Moreover, some of the over-

Figure 11. Change in real imports and exports of goods and

services

Percent, annual rate

2014201320122011201020092008

Imports

Exports

Source: Department of Commerce, Bureau of Economic Analysis.

Figure 12. Change in real government expenditures on

consumption and investment

Percent, annual rate

2014201320122011201020092008

H1 H2

Federal

State and local

Source: Department of Commerce, Bureau of Economic Analysis.

Monetary Policy and Economic Developments 13

all drag on demand was offset in 2014 by an increase

in transfers resulting from the Affordable Care Act.

The federal unified deficit narrowed further last year,

reflecting both the previous years’ spending cuts and

an increase in tax receipts resulting from the ongoing

economic expansion. The budget deficit was 2¾ per-

cent of GDP for fiscal year 2014, and the Congres-

sional Budget Office projects that it will be about

2½ percent in 2015. As a result, overall federal debt

held by the public stabilized as a share of GDP in

2014, albeit at a relatively high level.

. . . and state and local government expenditures

are also turning up

The expansion of economic activity has also led to

continued slow improvements in the fiscal position of

most state and local governments. Consistent with

improving finances, states and localities expanded

employment rolls in 2014. Furthermore, state and

local expenditures on construction projects rose a

touch last year following several years of declines.

Financial Developments

The expected path for the federal funds rate

flattened

Market participants seemed to judge the incoming

domestic economic data since the middle of last year,

especially the employment reports, as supporting

expectations for continued economic expansion in

the United States; however, concerns about the for-

eign economic outlook weighed on investor senti-

ment. On balance, market-based measures of the

expected (or mean) path of the federal funds rate

through late 2017 have flattened, but the expected

timing of the initial increase in the federal funds rate

from its current target range was about unchanged.

In addition, according to the results of the most

recent Survey of Primary Dealers and the Survey of

Market Participants, both conducted by the Federal

Reserve Bank of New York just prior to the January

FOMC meeting, respondents judged that the initial

increase in the target federal funds rate was most

likely to occur around mid-2015, little changed from

the results of those surveys from last June.

Mean-

while, in part because the passage of time brought

the anticipated date of the initial increase in the fed-

eral funds rate closer, measures of policy rate uncer-

tainty based on interest rate derivatives edged higher,

on net, from their mid-2014 levels.

Longer-term Treasury yields and other sovereign

benchmark yields declined

Yields on longer-term Treasury securities have con-

tinued to move down since the middle of last year on

net (

figure 13). In particular, the yields on 10- and

30-year nominal Treasury securities declined about

40 basis points and 60 basis points, respectively, from

their levels at the end of June 2014. The decreases in

longer-term yields were driven especially by reduc-

tions in longer-horizon forward rates. For example,

the 5-year forward rate 5 years ahead dropped about

80 basis points over the same period. Long-term

benchmark sovereign yields in advanced foreign

economies (AFEs) have also moved down signifi-

cantly in response to disappointing growth and very

low and declining rates of inflation in a number of

foreign countries as well as the associated actual and

anticipated changes in monetary policy abroad.

The declines in longer-term Treasury yields and long-

horizon forward rates seem to largely reflect reduc-

tions in term premiums—the extra return investors

expect to obtain from holding longer-term securities

as opposed to holding and rolling over a sequence of

short-term securities for the same period. Market

participants pointed to several factors that may help

to explain the reduction in term premiums. First,

very low and declining AFE yields and safe-haven

flows associated with the deterioration in the foreign

economic outlook likely have increased demand for

Treasury securities. Second, the weaker foreign eco-

The results of the Survey of Primary Dealers and of the Survey

of Market Participants are available on the Federal Reserve

Bank of New York’s website at

www.newyorkfed.org/markets/

primarydealer_survey_questions.html

and www.newyorkfed.org/

markets/survey_market_participants.html

, respectively.

Figure 13. Yields on nominal Treasury securities

5-year

30-year

Percent

20152013201120092007200520032001

Daily

10-year

Note: The Treasury ceased publication of the 30-year constant maturity series on

February 18, 2002, and resumed that series on February 9, 2006.

Source: Department of the Treasury.

14 101st Annual Report | 2014

nomic outlook coupled with the steep decline in oil

prices may have led investors to put higher odds on

scenarios in which U.S. inflation remains quite low

for an extended period. Investors may see nominal

long-term Treasury securities as an especially good

hedge against such risks. Finally, market participants

may have increased the probability they attach to

outcomes in which U.S. economic growth is persis-

tently subdued. Indeed, the 5-year forward real yield

5 years ahead, obtained from yields on Treasury

Inflation-Protected Securities, has declined further,

on net, since the middle of last year and stands well

below levels commonly cited as estimates of the

longer-run real short rate.

Consistent with moves in the yields on longer-term

Treasury securities, yields on 30-year agency

mortgage-backed securities (MBS)—an important

determinant of mortgage interest rates—decreased

about 30 basis points, on balance, over the second

half of 2014 and early 2015.

Liquidity conditions in Treasury and agency MBS

markets were generally stable . . .

On balance, indicators of Treasury market function-

ing remained stable over the second half of 2014 even

as the Federal Reserve trimmed the pace of its asset

purchases and ultimately brought the purchase pro-

gram to a close at the end of October. The Treasury

market experienced a sharp drop in yields and signifi-

cantly elevated volatility on October 15, as technical

factors reportedly amplified price movements follow-

ing the release of the somewhat weaker-than-

expected September U.S. retail sales data. However,

market conditions recovered quickly and liquidity

measures, such as bid-asked spreads, have been gen-

erally stable since then. Moreover, Treasury auctions

generally continued to be well received by investors.

As in the Treasury market, liquidity conditions in the

agency MBS market were generally stable, with the

exception of mid-October. Dollar-roll-implied

financing rates for production coupon MBS—an

indicator of the scarcity of agency MBS for settle-

ment— suggested limited settlement pressures in

these markets over the second half of 2014 and

early 2015.

. . . and short-term funding markets also

continued to function well as rates moved

slightly higher overall

Conditions in short-term dollar funding markets also

remained stable during the second half of 2014 and

early 2015. Both unsecured and secured money mar-

ket rates moved modestly higher late in 2014 but

remained close to their averages since the federal

funds rate reached its effective lower bound. Unse-

cured offshore dollar funding markets generally did

not exhibit signs of stress, and the repurchase agree-

ment, or repo, market functioned smoothly with

modest year-end pressures.

Money market participants continued to focus on the

ongoing testing of the Federal Reserve’s monetary

policy tools. The offering rate in the overnight reverse

repurchase agreement (ON RRP) exercise has contin-

ued to provide a soft floor for other rates on secured

borrowing, and the term RRP testing operations that

were conducted in December and matured in early

January seemed to help alleviate year-end pressures

in money markets. For a detailed discussion of the

testing of monetary policy tools, see the box “

Addi-

tional Testing of Monetary Policy Tools

” on pages

36–37 of the February 2015 Monetary Policy Report.

Broad equity price indexes rose despite higher

volatility, while risk spreads on corporate debt

widened

Over the second half of 2014 and early 2015, broad

measures of U.S. equity prices increased further, on

balance, but stock prices for the energy sector

declined substantially, reflecting the sharp drops in

oil prices (

figure 14). Although increased concerns

about the foreign economic outlook seemed to weigh

on risk sentiment, the generally positive tone of U.S.

economic data releases as well as declining longer-

term interest rates appeared to provide support for

equity prices. Overall equity valuations by some con-

ventional measures are somewhat higher than their

historical average levels, and valuation metrics in

Figure 14. Equity prices

S&P 500 index

100

120

140

December 31, 2007 = 100

20152012200920062003200019971994

Daily

Dow Jones

bank index

Source: Dow Jones bank index and Standard & Poor’s 500 index via Bloomberg.

Monetary Policy and Economic Developments 15

some sectors continue to appear stretched relative to

historical norms. Implied volatility for the S&P 500

index, as calculated from options prices, increased

moderately, on net, from low levels over the summer.

Corporate credit spreads, particularly those for

speculative-grade bonds, widened from the fairly low

levels of last summer, in part because of the under-

performance of energy firms. Overall, corporate

bond spreads across the credit spectrum have been

near their historical median levels recently. For fur-

ther discussion of asset prices and other financial sta-

bility issues, see the box “

Developments Related to

Financial Stability

” on pages 24–25 of the Febru-

ary 2015 Monetary Policy Report.

Bank credit and the M2 measure of the money

stock continued to expand

Aggregate credit provided by commercial banks

increased at a solid pace in the second half of 2014

(

figure 15). The expansion in bank credit was mainly

driven by moderate loan growth coupled with contin-

ued robust expansion of banks’ holdings of U.S.

Treasury securities, which was reportedly influenced

by efforts of large banks to meet the new Basel III

Liquidity Coverage Ratio requirements. The growth

of loans on banks’ books was generally consistent

with the SLOOS reports of increased loan demand

and further easing of lending standards for many

loan categories over the second half of 2014. Mean-

while, delinquency and charge-off rates fell across

most major loan types.

Measures of bank profitability were little changed in

the second half of 2014, on net, and remained below

their historical averages. Equity prices of large

domestic bank holding companies (BHCs) have

increased moderately, on net, since the middle of last

year. Credit default swap (CDS) spreads for large

BHCs were about unchanged.

The M2 measure of the money stock has increased at

an average annualized rate of about 5½ percent since

last June, below the pace registered in the first half of

2014 and about in line with the pace of nominal

GDP. The deceleration was driven by a moderation

in the growth rate of liquid deposits in the banking

sector relative to the first half of 2014. Although

demand for currency weakened in the third quarter

of 2014 relative to the first half of the year, currency

growth has been strong since November.

Municipal bond markets functioned smoothly, but

some issuers remained strained

Credit conditions in municipal bond markets have

generally remained stable since the middle of last

year. Over that period, the MCDX—an index of

CDS spreads for a broad portfolio of municipal

bonds—and ratios of yields on 20-year general obli-

gation municipal bonds to those on longer-term

Treasury securities increased slightly.

Nevertheless, significant financial strains were still

evident for some issuers. Puerto Rico, with

speculative-grade-rated general obligation bonds,

continued to face challenges from subdued economic

performance, severe indebtedness, and other f iscal

pressures. Meanwhile, the City of Detroit emerged

from bankruptcy late in 2014 after its debt restructur-

ing plan was approved by a federal judge.

International Developments

Bond yields in the advanced foreign economies

continued to decline . . .

As noted previously, long-term sovereign yields in the

AFEs moved down further during the second half of

2014 and into early 2015 on continued low inflation

readings abroad and heightened concerns over the

strength of foreign economic growth as well as amid

substantial monetary policy accommodation (

fig-

ure 16

). German yields fell to record lows, as the

European Central Bank (ECB) implemented new

liquidity facilities, purchased covered bonds and

asset-backed securities, and announced it would

begin buying euro-area sovereign bonds. Specifically,

the ECB said that it would purchase €60 billion per

Figure 15. Ratio of total commercial bank credit to nominal

gross domestic product

Percent

2014201320122011201020092008200720062005

Quarterly

Source: Federal Reserve Board, Statistical Release H.8, “Assets and Liabilities of

Commercial Banks in the United States”; Department of Commerce, Bureau of

Economic Analysis.

16 101st Annual Report | 2014

month of euro-area public and private bonds

through at least September 2016. Japanese yields also

declined, reflecting the expansion by the Bank of

Japan (BOJ) of its asset purchase program. In the

United Kingdom, yields fell as data showed declining

inflation and some moderation in economic growth,

although they have retraced a little of that move in

recent weeks, in part as market sentiment toward the

U.K. outlook appears to have improved somewhat.

In emerging markets, yields were mixed—falling, for

the most part, in Asia and generally rising modestly

in Latin America—as CDS spreads widened amid

growing credit concerns, particularly in some oil-

exporting countries.

. . . while the dollar has strengthened markedly

The broad nominal value of the dollar has increased

markedly since the middle of 2014, with the U.S. dol-

lar appreciating against almost all currencies (

fig-

ure 17

). The increase in the value of the dollar was

largely driven by additional monetary easing abroad

and rising concerns about foreign growth—forces

similar to those that drove benchmark yields

lower—in the face of expectations of solid U.S.

growth and the anticipated start of monetary tight-

ening in the United States later this year. Both the

euro and the yen have depreciated about 20 percent

against the dollar since mid-2014. Notwithstanding

the sharp nominal appreciation of the dollar since

mid-2014, the real value of the dollar, measured

against a broad basket of currencies, is currently

somewhat below its historical average since 1973 and

well below the peak it reached in early 1985.

Foreign equity indexes were mixed over the period.

Japanese equities outperformed other AFE indexes,

helped by the BOJ’s asset purchase expansion. Euro-

area equities are up modestly from their mid-2014

levels, boosted recently by monetary easing. How-

ever, euro-area bank shares substantially underper-

for med broader indexes, partly reflecting low profit-

ability, weak operating environments, and lingering

vulnerabilities to economic and financial shocks.

EME equities indexes were mixed, with most emerg-

ing Asian indexes rising and some of the major Latin

American indexes moving down.

Economic growth in the advanced foreign

economies, while still generally weak, firmed

toward the end of the year

Economic growth in the AFEs, which was weak in

the first half of 2014, firmed toward the end of the

second half of the year, supported in part by lower

oil prices and more accommodative monetary poli-

cies. The euro-area economy barely grew in the third

quarter and unemployment remained near record

highs, but the pace of economic activity moved up in

the fourth quarter. Notwithstanding more supportive

monetary policy and the recent pickup in euro-area

growth, negotiations over additional financial assis-

tance for Greece have the potential to trigger adverse

market reactions and resurrect financial stresses that

might impair growth in the broader euro-area

economy. Japanese real GDP contracted again in the

third quarter, following a tax hike–induced plunge in

the second quarter, but it rebounded toward the end

Figure 16. 10-year nominal benchmark yields in advanced

foreign economies

Japan

Germany

1.0

1.5

2.0

2.5

3.0

Percent

201520142013

Daily

United Kingdom

Source: Bloomberg.

Figure 17. U.S. dollar exchange rate against broad index

and selected major currencies

Yen

Broad

100

105

110

115

120

125

130

135

140

145

150

155

160

January 4, 2012 = 100

2015201420132012

Daily

Euro

Note: The data are in foreign currency units per dollar.

Source: Federal Reserve Board, Statistical Release H.10, “Foreign Exchange

Rates.”

Monetary Policy and Economic Developments 17

of the year as exports and household spending

increased. In contrast, economic activity in the

United Kingdom and Canada was robust in the third

quarter but moderated in the fourth quarter.

The fall in oil prices and other commodity prices

pushed down headline inflation across the major

AFEs. Most notably, 12-month euro-area inflation

continued to trend down, falling to negative 0.6 per-

cent in January. Declines in inflation and in market-

based measures of inflation expectations since mid-

2014 prompted the ECB to increase its monetary

stimulus. Similar considerations led the BOJ to step

up its pace of asset purchases in October. The Bank

of Canada lowered its target for the overnight rate in

January in light of the depressing effect of lower oil

prices on Canadian inflation and economic activity,

as oil exports are nearly 20 percent of total goods

exports. Several other foreign central banks lowered

their policy rates, either reaching or pushing further

into negative territory, including in Denmark, Swe-

den, and Switzerland—the last of which did so in the

context of removing its floor on the euro-Swiss franc

exchange rate.

Growth in the emerging market economies

improved but remained subdued

Following weak growth earlier last year, overall eco-

nomic activity in the EMEs improved a bit in the sec-

ond half of 2014, but performance varied across

economies. Growth in Asia was generally solid, sup-

ported by external demand, particularly from the

United States, and improved terms of trade due to

the sharp decline in commodity prices. In contrast,

the decline in commodity prices, along with macro-

economic policy challenges, weighed on economic

activity in several South American countries.

In China, exports expanded rapidly in the second

half of last year, but f ixed investment softened, as

real estate investment slowed amid a weakening prop-

erty market. Responding to increased concerns over

the strength of growth, the authorities announced

additional targeted stimulus measures in an effort to

prevent the economy from slowing abruptly. In much

of the rest of emerging Asia, exports, particularly to

the United States, supported a step-up in growth

from the first half of the year. The Mexican economy

continued to grow at a moderate pace in the second

half of 2014, with solid exports to the United States

but lingering softness in household demand. In Bra-

zil, economic activity remained lackluster amid fall-

ing commodity prices, diminished business confi-

dence, and tighter macroeconomic policy. Declining

oil prices were especially disruptive for several econo-

mies with heavy dependence on oil exports, including

Russia and Venezuela.

Inflation continued to be subdued in most EMEs.

The fall in the price of oil contributed to a modera-

tion of headline inflation in several EMEs, including

China. However, this contribution was limited in

many EMEs due to the prevalence of administered

energy prices, which lower the pass-through of

changes in oil prices to consumer prices. In several

countries, including Indonesia and Malaysia, the fall

in energy prices prompted governments to cut fuel

subsidies, leading to a rise in domestic prices of fuel

and in inflation late in 2014. With inflation low or

declining, some central banks, including those of

China, Korea, and Chile, loosened monetary policy

to support growth. In other EMEs, including Brazil

and Malaysia, inflationary pressures stemming from

depreciating currencies or from reductions in fuel

subsidies prompted central banks to raise policy

rates. The central bank of Russia sharply tightened

monetary policy to combat inflationary pressures

and stabilize its financial markets, which came under

considerable pressure in late 2014.

Part 2: Monetary Policy

The Federal Open Market Committee (FOMC) con-

cluded its asset purchase program at the end of Octo-

ber in light of the substantial improvement in the out-

look for the labor market since the inception of the

program. To support further progress toward maxi-

mum employment and price stability, the FOMC has

kept the target federal funds rate at its effective lower

bound and maintained the Federal Reserve’s holdings

of longer-term securities at sizable levels. To give

greater clarity to the public about its policy outlook,

the Committee has also continued to provide qualita-

tive guidance regarding the future path of the federal

funds rate. In particular, the Committee indicated at its

two most recent meetings that it can be patient in

beginning to normalize the stance of monetary policy

and continued to emphasize the data-dependent nature

of its policy stance. Following its September meeting,

and as part of prudent planning, the Committee

announced updated principles and plans for the even-

tual normalization of monetary policy.

The FOMC concluded its asset purchases at the

end of October in light of substantial

improvement in the outlook for the labor market

At the end of October, the FOMC ended the asset

purchase program that began in September 2012

18 101st Annual Report | 2014

after having made further measured reductions in the

pace of its asset purchases at the prior meetings in

July and September.

The decision to end the pur-

chase program reflected the substantial improvement

in the outlook for the labor market since the pro-

gram’s inception—which had been the goal of the

asset purchases—and the Committee’s judgment that

the overall recovery was sufficiently strong to support

ongoing progress toward the Committee’s policy

objectives. However, the Committee judged that a

high degree of policy accommodation still remained

appropriate and maintained its existing policy of

reinvesting principal payments from its holdings of

agency debt and agency mortgage-backed securities

(MBS) in agency MBS and of rolling over maturing

Treasury securities at auction. By keeping the Federal

Reserve’s holdings of longer-term securities at sizable

levels, this policy is expected to help maintain accom-

modative financial conditions by putting downward

pressure on longer-term interest rates and supporting

mortgage markets. In turn, those effects are expected

to contribute to progress toward both the maximum

employment and price stability objectives of

the FOMC.

To support further progress toward its objectives,

the Committee has kept the target federal funds

rate at its lower bound and updated its forward

rate guidance

The Committee has maintained the exceptionally low

target range of 0 to ¼ percent for the federal funds

rate to support further progress toward its objectives

of maximum employment and price stability. In addi-

tion, the FOMC has provided guidance about the

likely future path of the federal funds rate in an effort

to give greater clarity to the public about its policy

outlook. In particular, the Committee has reiterated

that, in determining how long to maintain this target

range, it will assess realized and expected progress

toward its objectives. This assessment will continue to

take into account a wide range of information,

including measures of labor market conditions, indi-

cators of inflation pressures and inflation expecta-

tions, and readings on financial and international

developments. Based on its assessment of these fac-

tors, before updating its guidance in December, the

Committee had been indicating that it likely would

be appropriate to maintain the current target range

for the federal funds rate for a considerable time fol-

lowing the end of the asset purchase program, espe-

cially if projected inflation continued to run below

the Committee’s 2 percent longer-run goal and pro-

vided that longer-term inflation expectations

remained well anchored.

In light of the conclusion of the asset purchase pro-

gram at the end of October and the further progress

that the economy had made toward the Committee’s

objectives, the FOMC updated its forward guidance

at its December meeting. In particular, the Commit-

tee stated that it can be patient in beginning to nor-

malize the stance of monetary policy, but it also

emphasized that the Committee saw the revised lan-

guage as consistent with the guidance in its previous

statement.

The Committee restated the updated for-

ward guidance following its January meeting based

on its assessment of the economic information avail-

able at that time.

In her December press conference, Chair Yellen

emphasized that the update to the forward guidance

did not signify a change in the Committee’s policy

intentions, but rather was a better reflection of the

Committee’s focus on the economic conditions that

would make an increase in the federal funds rate

appropriate.

Chair Yellen additionally indicated

that, consistent with the new language, the Commit-

tee was unlikely to begin the normalization process

for at least the following two meetings. There are a

range of views within the Committee regarding the

appropriate timing of the first increase in the federal

funds rate, in part reflecting differences in partici-

pants’ expectations for how the economy would

evolve. By the time of liftoff, the Committee expects

some further decline in the unemployment rate and

additional improvement in labor market conditions.

In addition, the Committee anticipates that, on the

basis of incoming data, it will be reasonably confi-

dent that inflation will move back over the medium

term to its 2 percent objective.

See Board of Governors of the Federal Reserve System (2014),

“Federal Reserve Issues FOMC Statement,” press release, Octo-

ber 29,

www.federalreserve.gov/newsevents/press/monetary/

20141029a.htm

See Board of Governors of the Federal Reserve System (2014),

“Federal Reserve Issues FOMC Statement,” press release,

December 17,

www.federalreserve.gov/newsevents/press/

monetary/20141217a.htm

See Board of Governors of the Federal Reserve System (2015),

“Federal Reserve Issues FOMC Statement,” press release, Janu-

ary 28,

www.federalreserve.gov/newsevents/press/monetary/

20150128a.htm

See Board of Governors of the Federal Reserve System (2014),

“Transcript of Chair Yellen’s FOMC Press Conference,”

December 17,

www.federalreserve.gov/mediacenter/files/

FOMCpresconf20141217.pdf

Monetary Policy and Economic Developments 19

The Committee has reiterated that, when it decides to

begin to remove policy accommodation, it will take a

balanced approach consistent with its longer-run

goals of maximum employment and inflation of

2 percent. In addition, the Committee continues to

anticipate that, even after employment and inflation

are near mandate-consistent levels, economic condi-

tions may, for some time, warrant keeping the target

federal funds rate below levels the Committee views

as normal in the longer run. As emphasized by Chair

Yellen in her recent press conferences, FOMC partici-

pants provide a number of explanations for this view,

with many citing the residual effects of the financial

crisis. These effects are expected to ease gradually,

but they are seen as likely to continue to constrain

household spending for some time.

The FOMC has stressed the data-dependent nature

of its policy stance and indicated that if incoming

information signals faster progress than the Commit-

tee expects, increases in the target range for the fed-

eral funds rate will likely occur sooner than the Com-

mittee anticipates. The FOMC also stated that in the

case of slower-than-expected progress, increases in

the target range will likely occur later than

anticipated.

The size of the Federal Reserve’s balance sheet

stabilized with the conclusion of the asset

purchase program

After the conclusion of the large-scale asset purchase

program at the end of October, the Federal Reserve’s

total assets stabilized at around $4.5 trillion (

fig-

ure 18). As a result of the asset purchases over the

second half of 2014, before the completion of the

program, holdings of U.S. Treasury securities in the

System Open Market Account (SOMA) increased

$56 billion to $2.5 trillion, and holdings of agency

debt and agency MBS increased $78 billion to

$1.8 trillion on net. On the liability side of the bal-

ance sheet, the increase in the Federal Reserve’s

assets was largely matched by increases in currency in

circulation and reverse repurchase agreements.

Given the Federal Reserve’s large securities holdings,

interest income on the SOMA portfolio continued to

support substantial remittances to the U.S. Treasury

Department. Preliminary estimates suggest that the

Federal Reserve provided more than $98 billion of

such distributions to the Treasury in 2014 and about

$500 billion on a cumulative basis since 2008.

The FOMC continued to plan for the eventual

normalization of monetary policy . . .

FOMC meeting participants have had ongoing dis-

cussions of issues associated with the eventual nor-

malization of the stance and conduct of monetary

policy as part of prudent planning.

The discussions

See Board of Governors of the Federal Reserve System (2015),

“Reserve Bank Income and Expense Data and Transfers to the

Treasury for 2014,” press release, January 9,

www.federalreserve

.gov/newsevents/press/other/20150109a.htm

See Board of Governors of the Federal Reserve System (2014),

“Minutes of the Federal Open Market Committee, July 29–30,

2014,” press release, August 20,

www.federalreserve.gov/

newsevents/press/monetary/20140820a.htm

Figure 18. Federal Reserve assets and liabilities

Trillions of dollars

20152014201320122011201020092008

Weekly

Assets

Liabilities and capital

Other assets

Credit and liquidity

facilities

Agency debt and mortgage-backed securities holdings

Treasury securities held outright

Federal Reserve notes in circulation

Deposits of depository institutions

Capital and other liabilities

— 4.5

— 4.0

— 3.5

— 3.0

— 2.5

— 2.0

— 1.5

— 1.0

— .5

— 0

— .5

— 1.0

— 1.5

— 2.0

— 2.5

— 3.0

— 3.5

— 4.0

— 4.5

Note: “Credit and liquidity facilities” consists of primary, secondary, and seasonal credit; term auction credit; central bank liquidity swaps; support for Maiden Lane, Bear

Stearns, and AIG; and other credit facilities, including the Primary Dealer Credit Facility, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the

Commercial Paper Funding Facility, and the Term Asset-Backed Securities Loan Facility. “Other assets” includes unamortized premiums and discounts on securities held out-

right. “Capital and other liabilities” includes reverse repurchase agreements, the U.S. Treasury General Account, and the U.S. Treasury Supplementary Financing Account. Data

extend through February 18, 2015.

Source: Federal Reserve Board, Statistical Release H.4.1, “Factors Affecting Reserve Balances.”

20 101st Annual Report | 2014

involved various tools that could be used to control

the level of short-term interest rates, even while the

balance sheet of the Federal Reserve remains very

large, as well as approaches to normalizing the size

and composition of the Federal Reserve’s balance

sheet.

To inform the public about its approach to normal-

ization and to convey the Committee’s confidence in

its plans, the FOMC issued a statement regarding its

intentions for the eventual normalization of policy

following its September meeting. (That statement is

reproduced in the box “

Policy Normalization Principles

and Plans

” on page 35 of the February 2015 Mon-

etary Policy Report.) As was the case before the crisis,

the Committee intends to adjust the stance of mon-

etary policy during normalization primarily through

actions that influence the level of the federal funds

rate and other short-term interest rates. Regarding

the balance sheet, the Committee intends to reduce

securities holdings in a gradual and predictable man-

ner primarily by ceasing to reinvest repayments of

principal on securities held in the SOMA. The Com-

mittee noted that economic and financial conditions

could change, and that it was prepared to make

adjustments to its normalization plans if warranted.

. . . including by testing the policy tools to be

used

The Federal Reserve has continued to test the opera-

tional readiness of its policy tools, conducting daily

overnight reverse repurchase agreement (ON RRP)

operations, a series of term RRP operations, and sev-

eral tests of the Term Deposit Facility. To date, test-

ing has progressed smoothly, and short-term market

rates have generally traded above the ON RRP rate,

which suggests that the facility will be a useful

supplementary tool for the FOMC to use in addition

to the interest rate it pays on excess reserves (the

IOER rate) to control the federal funds rate during

the normalization process. Overall, testing operations

reinforced the Federal Reserve’s confidence in its

view that it has the tools necessary to tighten policy

at the appropriate time. (For more discussion of the

Federal Reserve’s preparations for the eventual nor-

malization of monetary policy, see the box “

Additional

Testing of Monetary Policy Tools

” on pages 36–37 of

the February 2015 Monetary Policy Report.)

Monetary Policy and Economic Developments 21

Monetary Policy Report

of July 2014

Summary

The overall condition of the labor market continued

to improve during the first half of 2014. Gains in

payroll employment picked up to an average monthly

pace of about 230,000, and the unemployment rate

fell to 6.1 percent in June, nearly 4 percentage points

below its peak in 2009. Notwithstanding those

improvements, a broad array of labor market indica-

tors—such as labor force participation, hiring and

quit rates, and the number of people working part

time for economic reasons—generally suggests that

significant slack remains in the labor market. Contin-

ued slow increases in most measures of labor com-

pensation also corroborate the view that labor

resources are not being fully utilized.

Inflation has moved up this year following unusually

low readings in 2013, but it has remained somewhat

below the Federal Open Market Committee’s

(FOMC) longer-run goal of 2 percent. The price

index for personal consumption expenditures (PCE)

rose 1¾ percent over the 12 months ending in May,

up from an increase of only 1 percent a year earlier.

The PCE price index excluding food and energy

items rose 1½ percent over the past 12 months.

Meanwhile, both survey- and market-based measures

of longer-term inflation expectations have remained

stable.

Real gross domestic product is reported to have

declined in the first quarter of this year, but a num-

ber of recent indicators suggest that economic activ-

ity rebounded in the second quarter. The pace of

economic growth abroad also appears to have quick-

ened in the second quarter following weakness earlier

this year, which should provide support for export

sales. Moreover, expansion in economic activity con-

tinues to be supported by ongoing job gains, a wan-

ing drag from fiscal policy, and accommodative

financial conditions. However, the housing sector has

shown little recent progress. While it has recovered

notably from its earlier trough, activity in the sector

leveled off in the wake of last year’s increase in mort-

gage rates, and readings this year have, overall, con-

tinued to be disappointing.

The Committee expects that, with appropriate policy

accommodation, economic activity will expand at a

moderate pace and labor market conditions will con-

tinue to move gradually toward levels that the Com-

mittee judges consistent with its dual mandate of

maximum employment and price stability. In addi-

tion, the Committee anticipates that with stable infla-

tion expectations and strengthening economic activ-

ity, inflation will, over time, return to the Commit-

tee’s 2 percent objective. Those expectations are

reflected in the June Summary of Economic Projec-

tions, which is included as Part 3 of this report. (The

June SEP is included as

Part 3 of the July 2014 Mon-

etary Policy Report on pages 41–54; it is also included

section 9 of this annual report.)

Financial conditions have generally remained sup-

portive of economic growth. Longer-term interest

rates have continued to be low by historical stan-

dards, and over the first half of the year those inter-

est rates moved down significantly in the United

States as well as in most other advanced economies.

Overall, borrowing conditions for households have

continued to slowly improve amid rising house and

equity prices and the faster pace of employment

growth so far this year. Credit flows to large nonfi-

nancial businesses have remained strong, and small

business lending activity has shown signs of improve-

ment in recent months.

With respect to financial stability, signs of risk-taking

that could leave segments of the U.S. financial sector

vulnerable to possible adverse events have increased

modestly this year, albeit from a subdued level. Prices

for real estate, equities, and corporate debt have risen

and valuation measures have increased, but valua-

tions remain roughly in line with historical norms.

Signs of excesses that could lead to higher future

defaults and losses have emerged in some sectors,

including for speculative-grade corporate bonds and

leveraged loans. At the same time, financial firms’ use

of short-term wholesale funding has not increased

materially and the capital and liquidity position of

the banking sector continued to improve. The Federal

Reserve and other agencies took further supervisory

and regulatory steps to improve resilience, including

conducting the 2014 stress tests of the largest bank

holding companies (BHCs); finalizing rules to

strengthen prudential standards for the largest

domestic BHCs and for the U.S. operations of for-

eign banking firms; and raising leverage ratio stan-

dards for the largest, most interconnected firms.

To support continued progress toward maximum

employment and price stability, the FOMC has main-

tained a highly accommodative stance of monetary

policy. Specifically, the Committee has kept its target

22 101st Annual Report | 2014

range for the federal funds rate at 0 to ¼ percent;

updated its forward guidance regarding the path of

the federal funds rate; and continued to increase its

sizable holdings of longer-term securities, though at a

gradually diminishing pace. In particular, the Com-

mittee made additional measured reductions at each

of its first four rebegularly scheduled meetings in

2014 in the monthly pace of its asset purchases. The

FOMC also stated at each meeting that, if incoming

information continued to broadly support the Com-

mittee’s assessment of the economic outlook, the

Committee would likely reduce the pace of asset pur-

chases in further measured steps at future meetings.

However, the Committee also noted that its asset pur-

chases are not on a preset course, and that decisions

about their pace will remain contingent on the eco-

nomic outlook.

The FOMC has provided forward guidance for the

federal funds rate based on its assessment of eco-

nomic and financial conditions. As 2014 began, the

Committee’s forward rate guidance included quanti-

tative thresholds relating to the unemployment rate

and inflation. However, with the unemployment rate

having neared its 6½ percent threshold, the Commit-

tee decided at its March meeting to replace the

numerical thresholds with a qualitative characteriza-

tion of its approach to determining how long to

maintain the current 0 to ¼ percent target range for

the federal funds rate. Specifically, the Committee

stated that it will assess progress—both realized and

expected—toward its objectives of maximum

employment and 2 percent inflation, taking into

account a wide range of information, including

measures of labor market conditions, indicators of

inflation pressures and inflation expectations, and

readings on financial developments. The Committee

continues to anticipate, based on its assessment of

these factors, that it likely will be appropriate to

maintain the current target range for the federal

funds rate for a considerable time after the asset pur-

chase program ends. The Committee additionally

stated its anticipation that, even after employment

and inflation are near mandate-consistent levels, eco-

nomic conditions may, for some time, warrant keep-

ing the target federal funds rate below levels the

Committee views as normal in the longer run.

As part of prudent planning, the Federal Reserve has

continued to prepare for the eventual normalization

of the stance and conduct of monetary policy. The

FOMC remains confident that it has the tools it

needs to raise short-term interest rates when the time

is right and to achieve the desired level of short-term

interest rates thereafter, even while the Federal

Reserve is holding a very large balance sheet. The

Committee intends to continue its discussions about

policy normalization at upcoming meetings while it

proceeds with testing the operational readiness of its

tools; it expects to provide to the public more infor-

mation about its normalization plans later this year.

Part 1: Recent Economic and Financial

Developments

Labor market conditions continued to improve over

the first half of this year. Gains in payroll employ-

ment since the start of the year have averaged about

230,000 jobs per month, up a little from the average

pace in 2013, and the unemployment rate declined to

6.1 percent in June, the lowest rate recorded in more

than five years. Nevertheless, the jobless rate is still

above Federal Open Market Committee (FOMC)

participants’ estimates of the longer-run normal rate.

Other measures of labor utilization, as well as the

continued slow increases in most measures of labor

compensation, generally corroborate the view that

significant slack remains in the labor market. Infla-

tion, as measured by the price index for personal con-

sumption expenditures (PCE), averaged 1¾ percent

over the 12 months ending in May, higher than the

unusually low level over the preceding 12 months but

still somewhat below the Committee’s 2 percent

objective. Meanwhile, both survey- and market-based

measures of longer-term inflation expectations have

remained quite stable. Real gross domestic product

(GDP) was reported to have decreased in the first

quarter of this year, but the available infor mation for

the second quarter suggests that the decline was tran-

sitory. One area of concern, however, is the housing

sector, where activity softened by more, relative to its

earlier trajectory, than would have been expected

based on last year’s rise in mortgage interest rates.

Financial conditions have generally remained sup-

portive of economic growth. Longer-term interest

rates in the United States as well as in most other

advanced economies have partially reversed last

year’s increases, and borrowing conditions for house-

holds and small businesses have slowly improved,

while credit flows to large nonfinancial corporations

have remained strong.

Domestic Developments

Labor market conditions have strengthened

further . . .

The labor market continued to improve in the first

half of 2014. Payroll employment has increased by

Monetary Policy and Economic Developments 23

an average of about 230,000 per month so far this

year, higher than the average gain in 2013. The unem-

ployment rate continued to trend down, declining

from 6.7 percent in December 2013 to 6.1 percent in

June of this year, while the labor force participation

rate was little changed, on net, over the first half of

this year after having moved down considerably in

the second half of last year. The unemployment rate

has declined nearly 4 percentage points from its peak

in 2009, although it remains elevated when judged

against FOMC participants’ estimates of the longer-

run normal rate. Payrolls have reversed the cumula-

tive job losses that occurred over the last recession,

though that recovery has been achieved in the con-

text of a larger population and labor force.

An index constructed by Board staff that aims to

summarize movements in a broad array of labor

market indicators also suggests that labor market

conditions have strengthened further this year.

While increases in that index slowed a touch at the

beginning of this year, partly reflecting the effects of

the unseasonably cold and snowy weather this winter,

the pace has picked up again in recent months.

. . . but significant slack remains . . .

Notwithstanding those improvements, various labor

market indicators suggest that a significant degree of

slack remains in labor utilization. For instance, meas-

ures of labor underutilization that incorporate

broader definitions of unemployment are still well

above their pre-recession levels, even though they

have moved down further this year. The proportion

of workers employed part time because they are

unable to find full-time work has similarly declined

but remains elevated, and hiring and quit rates are

still below their pre-recession norms. Moreover, the

median duration of unemployment is still well above

its long-run average.

The declines in the participation rate during the past

few years, within the context of a strengthening labor

market, also could be an indication of continuing

labor market slack. To be sure, movements in the par-

ticipation rate partly reflect the changing demo-

graphic composition of the population, most notably

the increasing share of older persons, who have

lower-than-average participation rates because they

are more likely to be retired. As such, many of those

exits from the labor force probably would have

occurred even if the labor market had been stronger.

However, some exits are likely occurring because the

prolonged period of high unemployment has led

some individuals to give up their job search, and such

dynamics could have harmful consequences for eco-

nomic activity in the long run.

. . . and wage growth has remained tepid

Continued slow increases in most measures of labor

compensation offer further evidence of labor market

slack. Compensation per hour in the nonfarm busi-

ness sector is estimated to have risen at a modest pace

of 2¼ percent over the four quarters ending in the

first quarter of this year; the employment cost index

for private industry workers rose at an annual rate of

only 1¾ percent in the same period; and average

hourly earnings rose about 2 percent over the

12 months ending in June, little changed from the

average rate of increase in hourly earnings during the

past several years. Over the past five years, the vari-

ous measures of nominal hourly compensation have

increased roughly 2 percent per year, on average, and

after adjusting for inflation, growth of real compen-

sation has fallen short of the gains in productivity

over this period.

Consumer price inflation has moved up . . .

Inflation has moved higher this year following unusu-

ally low readings in 2013. The PCE price index rose

1¾ percent over the 12 months ending in May, up

from the 1 percent increase recorded over the preced-

ing 12 months. The PCE price index excluding food

and energy items rose 1½ percent over the 12 months

ending in May, slightly less than the overall index.

The FOMC continues to judge that inflation at the

rate of 2 percent, as measured by the annual change

in the PCE price index, is most consistent over the

longer run with the Federal Reserve’s statutory man-

date. Thus, inflation remained somewhat below the

Committee’s goal. Some of the factors that contrib-

uted to the unusually low inflation in 2013, such as

the softness seen in non-oil import prices, have begun

to unwind and are pushing up inflation a little this

year. More generally, however, with wages growing

slowly and raw materials prices generally flat or mov-

ing downward, firms are not facing much in the way

of cost pressures that they might otherwise try to

pass on.

A portion of the recent increase in inflation reflects

movements in energy and food prices that appear

For details on the construction of the labor market conditions

index, see Hess Chung, Bruce Fallick, Christopher Nekarda,

and David Ratner (2014), “Assessing the Change in Labor Mar-

ket Conditions,” FEDS Notes (Washington: Board of Gover-

nors of the Federal Reserve System, May 22),

www

.federalreserve.gov/econresdata/notes/feds-notes/2014/assessing-

the-change-in-labor-market-conditions-20140522.html

24 101st Annual Report | 2014

transitory. Consumer energy prices rose at an annual

rate of nearly 6 percent over the 12 months ending in

May, partly reflecting strong demand for electricity

and natural gas during the cold winter. Global oil

prices have been remarkably stable for much of the

past year, with oil prices remaining mostly in a nar-

row range of between about $105 and $110 per barrel

and moving above that range only temporarily in

reaction to events in Iraq. Meanwhile, adverse grow-

ing conditions in both the United States and abroad

have pushed up wholesale prices for various food

commodities—including corn, wheat, and coffee—

and these higher raw materials prices have led to

somewhat larger increases in consumer food prices

this year.

. . . but inflation expectations have changed little

Survey- and market-based measures of inflation

expectations at medium- and longer-term horizons

have remained quite stable throughout the recent

period. Readings on inflation expectations 5 to

10 years ahead, as reported in the Thomson Reuters/

University of Michigan Surveys of Consumers, have

continued to move within a narrow range. In the Sur-

vey of Professional Forecasters, conducted by the

Federal Reserve Bank of Philadelphia, the median

expectation in the second quarter for the annual rate

of increase in the PCE price index over the next

10 years was 2 percent, similar to its level in recent

years. Meanwhile, market-based measures of

medium- (5-year) and longer-term (5-to-10-years-

ahead) inflation compensation derived from differ-

ences between yields on nominal Treasury securities

and Treasury Inflation-Protected Securities have also

remained within their respective ranges observed over

the past few years.

The first-quarter decline in real GDP appears to

have been transitory

Measures of real aggregate output—that is, GDP

and gross domestic income—were both reported to

have declined in the first quarter of this year.

Part of

the weakness in output was likely related to severe

weather early in the year.

But much of the drop in

first-quarter GDP reflected unusually large swings in

inventories and net exports, two volatile categories

for which the available monthly data point to a

rebound in the second quarter. In addition, a number

of recent indicators of second-quarter spending,

including motor vehicle sales, retail sales, and ship-

ments of capital goods, suggests that the overall pace

of consumer and business spending also picked up in

the second quarter. Expansion in real activity contin-

ues to be supported by ongoing job gains, a waning

drag from fiscal policy, and accommodative financial

conditions. However, activity in the housing sector

has yet to show persistent gains since it slowed in the

wake of last year’s rise in mortgage interest rates.

Export declines weighed heavily on

first-quarter GDP

Real exports of goods and services declined at an

annual rate of about 9 percent in the first quarter of

2014, coinciding with a global slowdown in trade.

The decline partly reflected a retrenchment in two

volatile categories, petroleum and agriculture, that

had surged in the fourth quarter of 2013. With real

imports of goods and services advancing in the first

quarter, albeit slowly, net exports subtracted 1½ per-

centage points—an unusually large amount—from

overall GDP growth. However, available data for

April and May indicate that exports rebounded in the

second quarter, and net exports will likely be more

supportive of growth in the second quarter.

The current account deficit widened somewhat in the

first quarter of this year after having narrowed fur-

ther over 2013; however, measured relative to nomi-

nal GDP, the deficit remains near its narrowest read-

ings since the late 1990s. In the second half of 2013,

the current account deficit continued to be financed

mostly by purchases of Treasury and corporate secu-

rities by both foreign official investors and foreign

private investors. Foreign private purchases remained

strong in the first quarter of 2014, but official inflows

weakened as conditions in emerging market econo-

mies (EMEs) worsened early in the quarter.

Gains in wealth and income are supporting

consumer spending

Smoothing through weather-related fluctuations,

consumer spending was reported to have risen at a

modest annual rate of 1 percent over the first five

months of this year, while disposable personal

income advanced at a stronger pace of 2¼ percent

over the same period.

The faster pace of job gains so

Gross domestic income measures the same economic concept as

GDP, and the two estimates would be identical if they were

measured without error

Manufacturing output was held down by both snow and

extreme cold in parts of the country in January and February. In

March, output appears to have been boosted significantly by

manufacturers making up for earlier production curtailments.

Factory output subsequently dropped back in April, consistent

with the view that this makeup production had been achieved.

In its third release of quarterly GDP, the Bureau of Economic

Analysis reported that consumer spending on health-care ser-

vices declined in the first quarter. This estimate reflected the

incorporation of census data from the U.S. Census Bureau’s

Monetary Policy and Economic Developments 25

far this year has helped improve the economic pros-

pects of many households and has contributed to a

pickup in the pace of aggregate income growth,

though it is not yet clear how widely these income

gains have been shared across the population. In

addition, personal tax payments and social security

contributions, which surged last year as a conse-

quence of higher federal payroll and income taxes,

are no longer weighing as heavily on income growth.

Consumption growth this year also has been sup-

ported by ongoing gains in household net worth.

House prices, which are of particular importance for

the wealth position of many middle-income house-

holds, have continued to move higher, with the Core-

Logic national index showing a rise of almost 9 per-

cent over the 12 months ending in May. Meanwhile,

the value of corporate equities has risen more than

15 percent over the past year and has added substan-

tially to net wealth. Reflecting those solid gains,

aggregate household net wealth is estimated to have

approached 6½ times the value of disposable per-

sonal income in the first quarter of this year, the

highest level observed for that ratio since 2007.

Coupled with low interest rates, the rise in incomes

has enabled many households to reduce their debt

payment burdens. The household debt service ratio—

that is, the ratio of required principal and interest

payments on outstanding household debt to dispos-

able personal income—dropped further in the first

quarter of this year and stood at a very low level by

historical standards.

Borrowing conditions for households are slowly

improving . . .

The improvements in households’ balance sheets so

far this year have been accompanied by a gradual

easing in borrowing conditions. For example, large

banks reported a net easing of standards for home

purchase loans to prime borrowers in the Federal

Reserve Board’s April 2014 Senior Loan Officer

Opinion Survey on Bank Lending Practices

(SLOOS).

SLOOS responses also indicated a net

easing in credit standards for consumer loans. Even

so, mortgage lending standards have remained tight

for many households; indeed, standards on nontradi-

tional mortgage loans were reported to have tight-

ened further in the April survey. Likely reflecting, in

part, the increased willingness to lend, the rate of

decline in mortgage debt has slowed so far this year,

and growth in other consumer credit has been robust.

. . . but consumer confidence remains tepid

Despite the strengthening in household incomes and

wealth, indicators of consumer sentiment still appear

somewhat depressed compared with their longer-run

norms. The Michigan survey’s index of consumer

sentiment—which incorporates households’ views

about their own financial situations as well as

broader economic conditions—has recovered notice-

ably from its recessionary low but has changed little,

on net, over the past year. The responses to a sepa-

rate survey question about income expectations dis-

play a similar pattern: Although an index of house-

holds’ expectations of real income changes in the

year ahead has recovered somewhat since 2011, it

remains substantially below the historical average

and suggests a more guarded outlook than the head-

line index.

Business investment has been lackluster, . . .

After recording modest gains in 2013, business fixed

investment ticked down in the first quarter of this

year, as a large decline in spending on nonresidential

structures was partly offset by a small increase in out-

lays for equipment and intangible (E&I) capital.

Although the expiration of a tax provision allowing

50 percent bonus depreciation may have pulled some

capital investment forward into late 2013, looking

over a longer period, the pattern of investment out-

lays over the past year and a half appears broadly

consistent with the sluggish pace of business output

growth during the period. Nevertheless, various

forward-looking indicators, such as business senti-

ment and earnings expectations of capital goods pro-

ducers, paint a fairly upbeat picture and point to a

pickup in the growth of E&I investment.

Business investment in structures has been relatively

weak this year, as demand for nonresidential build-

ings continues to be restrained by high vacancy rates

for existing properties and tight financing conditions

for new construction. However, the level of invest-

ment in drilling and mining structures is extremely

high by historical standards, a reflection of the boom

in oil and natural gas extraction.

Quarterly Services Survey, which showed a decline in the rev-

enues of health-care providers. By contrast, a variety of other

indicators, including data on Medicaid payments as well as

health-care exchange enrollments and subsidies related to the

Affordable Care Act, are suggestive of greater strength in

health-care spending.

The SLOOS is available on the Board’s website at www

.federalreserve.gov/boarddocs/snloansurvey

26 101st Annual Report | 2014

. . . even as corporate borrowing has expanded

and loan terms and standards appear to be

easing

The financial condition of large nonfinancial firms

has remained strong so far this year, with profitabil-

ity high and the default rate on nonfinancial corpo-

rate bonds generally low. Nonfinancial fir ms have

continued to raise funds at a robust pace, given

strong corporate credit quality and historically low

interest rates on corporate bonds. Indeed, bond issu-

ance by both investment- and speculative-grade non-

financial firms has been strong.

Moreover, credit availability in business loan markets

has shown further improvement. According to the

April SLOOS, banks again eased standards on com-

mercial and industrial (C&I) loans to firms of all

sizes in the first quarter, and many banks have eased

price-related and other terms on such loans. In addi-

tion, according to the Federal Reserve Board’s

May 2014 Survey of Terms of Business Lending,

loan rate spreads over market interest rates for newly

originated C&I loans have continued to decline. In

this environment, C&I loans on banks’ books and

commercial paper outstanding both have registered

solid increases. Issuance of leveraged loans continued

to be rapid in the first half of 2014, and issuance of

collateralized loan obligations reached very high lev-

els in the period from February to April.

Small busi-

ness lending activity has picked up as well in recent

months, likely reflecting some increase in credit avail-

ability as well as a strengthening in businesses’

demand for credit.

In the commercial real estate (CRE) sector, loans

continued to expand at a moderate pace, and

increases in banks’ CRE loans remained widespread

across all major CRE segments (that is, loans secured

by nonfarm nonresidential properties, multifamily

residential properties, and construction and land

development loans). According to the April SLOOS,

standards on CRE loans extended by banks also

eased in the first quarter. Special survey questions

asked about changes in terms on CRE loans over the

past year, and many banks reported having eased

interest rate spreads and increased maximum loan

sizes and terms to maturity. Nevertheless, standards

for construction and land development loans appear

to have remained relatively tight.

The drag from federal fiscal restraint is

waning . . .

Fiscal policy has been a contractionary force through

most of the past three years and was especially so in

2013, when the temporary payroll tax cut expired,

taxes increased for high-income households, and fed-

eral purchases were pushed down by the sequestra-

tion and caps on discretionary spending. Moreover,

in the fourth quarter of last year, disruptions related

to the government shutdown led to a sharp but tem-

porary reduction in federal purchases. For 2013 as a

whole, real federal purchases (as measured in the

national income and product accounts) fell 6¼ per-

cent, twice as large as the average decline in the previ-

ous two years.

This year, however, fiscal policy has become some-

what less restrictive for GDP growth, as the effects of

the 2013 tax and spending changes are fading. While

the expiration of emergency unemployment compen-

sation at the beginning of the year has exerted a drag

on consumer spending, medical benefits provided for

under the Affordable Care Act will likely support

increased consumption of medical services.

With few major changes in tax policy in 2014, federal

receipts have edged up to around 17 percent of GDP,

their highest level since before the recession. Mean-

while, nominal federal outlays as a share of GDP

have continued to trend downward but have

remained above the levels observed before the start of

the recession. Thus, the federal unified budget deficit

has narrowed again this year; the Congressional Bud-

get Office projects that the budget deficit for fiscal

year 2014 as a whole will be 3 percent of GDP, com-

pared with the fiscal 2013 deficit of 4 percent of

GDP. Overall federal debt held by the public has con-

tinued to rise, and the ratio of nominal federal debt

to GDP moved up to near 75 percent in early 2014.

. . . and state and local government expenditures

are turning up

At the state and local level, the ongoing strengthen-

ing in economic activity, as well as previous spending

cuts, has helped foster a gradual improvement in the

budget situations of most jurisdictions. Consistent

with improving sector finances, states and localities

have been expanding their workforces; employment

accelerated in the first half of the year after rising

New collateralized loan obligation (CLO) deals over this period

were reportedly structured to address certain restrictions in the

Volcker rule. In addition, the Federal Reserve Board announced

that bank holding companies have until July 21, 2017, to disin-

vest from non-Volcker-compliant CLOs originated prior to the

end of 2013. The extension for complying with the requirement

reportedly alleviated the risk of forced liquidations of such

instruments in the near term.

Monetary Policy and Economic Developments 27

modestly in the second half of 2013. Construction

expenditures by those governments, however, have

yet to show a sustained recovery.

The recovery in the housing market has lost

traction

After proceeding briskly in 2012 and the first half of

2013, the recovery in residential construction seems

to have faltered. Real residential investment declined

for two successive quarters around the turn of the

year, and the available data point to only a modest

gain in the second quarter. The renewed softness of

late has proven more extensive and persistent than

would have been expected given the rise in mortgage

interest rates around the middle of last year (see the

box “

The Slow Recovery of Housing Activity” on

pages 16–17 of the July 2014 Monetary Policy

Report). That said, household formation remains

depressed relative to demographic norms, and the

ongoing improvement in labor market conditions

could help spur a more decisive return to those

norms.

Productivity growth has been modest

In general, gains in labor productivity have been

modest in recent years. Output per hour in the non-

farm business sector has risen at an annual rate of

less than 1½ percent since 2007, well below the pace

of gains observed over the late 1990s and early 2000s.

The relatively slow pace of productivity growth likely

reflects, in part, the sustained weakness in capital

investment over the recession and recovery period,

and productivity gains may be better supported in

the future as outlays for productivity-enhancing capi-

tal equipment strengthen.

Financial Developments

The expected path for the federal funds rate

edged down

Market-based measures of the expected path of the

federal funds rate through late 2017 edged down, on

balance, over the first half of the year. After account-

ing for transitory factors such as weather, market

participants appeared to judge the incoming eco-

nomic data as somewhat better than they had

expected but as still continuing to point to subdued

inflationary pressures and an accommodative policy

stance by the FOMC. The relatively small movements

of the market-based measures are consistent with the

results of the most recent Survey of Primary Dealers

and the pilot survey of market participants, each

conducted just prior to the June FOMC meeting by

the Open Market Desk at the Federal Reserve Bank

of New York. Those surveys suggest that dealers and

buy-side respondents both anticipate that the initial

increase in the target federal funds rate from its cur-

rent range will occur in the third quarter of 2015,

slightly earlier than dealers had anticipated at the

beginning of this year and about the same as what

buy-side respondents had anticipated.

Finally, while

some forward measures of policy rate uncertainty

have risen, overall policy rate uncertainty has gener-

ally remained relatively low.

However, Treasury yields declined significantly,

especially at longer maturities, as have sovereign

bond yields in other advanced economies

After rising notably over the spring and summer

months of 2013, yields on longer-term Treasury secu-

rities drifted down over the first half of 2014 and

now stand at fairly low levels by historical standards.

In particular, while the yield on 5-year nominal

Treasury securities edged down only about 5 basis

points from its level at the end of December 2013, the

yields on the 10- and 30-year securities decreased

about 50 basis points and 60 basis points, respec-

tively. The decline in longer-term yields reflects a

notable reduction in longer-horizon forward rates,

with the 5-year-forward rate 5 years ahead dropping

about 105 basis points since year-end. Five-year-

forward inflation compensation over this period

declined 20 basis points, implying that much of this

reduction in nominal forward rates was concentrated

in forward real rates. Yields on 30-year agency

mortgage-backed securities (MBS) decreased about

35 basis points, on balance, over the same period.

Long-term benchmark sovereign yields in advanced

foreign economies (AFEs) have also moved down

since late last year, with particularly marked reduc-

tions in the euro area. Market participants have

pointed to several potential explanations for the

declines in U.S. and foreign yields. One possible

explanation is that market participants have lowered

their expectations for future short-term interest rates

around the globe. This downward adjustment in

expectations may be due to a combination of a lower

assessment of the global economy’s long-run poten-

tial growth rate and a decrease in long-run inflation

expectations. Indeed, the lower yields in the euro area

are consistent with indications of declining inflation

The results of the Survey of Primary Dealers and of the pilot

survey of market participants are available on the Federal

Reserve Bank of New York’s website at

www.newyorkfed.org/

markets/primarydealer_survey_questions.html

and

www.newyorkfed.org/markets/pilot_survey_market_participants

.html

, respectively.

28 101st Annual Report | 2014

and weak growth in the euro area in recent months,

bolstering expectations that the European Central

Bank (ECB) would loosen its monetary policy, as it

eventually did at its meeting in early June.

In addition, term premiums—the extra return inves-

tors expect to obtain from holding longer-term secu-

rities as opposed to holding and rolling over a

sequence of short-term securities for the same

period—may have come down, reflecting several

potential factors. One potential factor is a reduction

in the amount of compensation for interest rate risk

that investors require to hold fixed-income securities,

likely due in part to perceptions that uncertainty

about the outlook for monetary policy and economic

growth has decreased; indeed, swaption-implied vola-

tility on longer-term rates has fallen noticeably since

the beginning of the year. Another potential factor is

increased demand for Treasury securities from price-

insensitive investors, such as pension funds and com-

mercial banks. Lastly, in light of the notable

co-movements between forward interest rates at

longer horizons in the United States and other

advanced economies, it appears likely that there is a

global component of term premiums that is affected

not only by U.S. developments, but also by foreign

developments, such as investors becoming increas-

ingly confident that policy rates at the major foreign

central banks will remain low for an extended period.

Broad equity price indexes increased further, and

risk spreads on corporate debt declined

Although equity investors appeared to pull back

from the market for a time early in the year in reac-

tion to concerns about the strength of some EMEs

and the possible implications for global growth,

broad measures of U.S. equity prices have posted

solid gains of 6 percent since the beginning of 2014,

on balance, after having risen 30 percent in 2013.

Overall, equity investors appeared to become more

confident in the near-term economic outlook amid

somewhat better-than-expected economic data

releases, declining longer-term interest rates, and

upward revisions to expected year-ahead earnings per

share for firms in the S&P 500 index.

Some broad equity price indexes have increased to

all-time highs in nominal terms since the end of 2013.

However, valuation measures for the overall market

in early July were generally at levels not far above

their historical averages, suggesting that, in aggregate,

investors are not excessively optimistic regarding

equities. Nevertheless, valuation metrics in some sec-

tors do appear substantially stretched—particularly

those for smaller firms in the social media and bio-

technology industries, despite a notable downturn in

equity prices for such firms early in the year. More-

over, implied volatility for the overall S&P 500 index,

as calculated from option prices, has declined in

recent months to low levels last recorded in the mid-

1990s and mid-2000s, reflecting improved market

sentiment and, perhaps, the influence of “reach for

yield” behavior by some investors.

Credit spreads in the corporate sector have also

declined, on balance, in recent months. After having

temporarily increased early in the year, the spreads of

yields on corporate bonds to yields on Treasury secu-

rities of comparable maturities ended the first half of

the year about unchanged or a bit narrower. Credit

spreads on high-yield corporate bonds are near the

bottom of their range over the past decade. While

spreads on syndicated loans have changed little this

year, they are also relatively low. For further discus-

sion of asset prices and other financial stability

issues, see the box “

Developments Related to Finan-

cial Stability

” on pages 22–23 of the July 2014 Mon-

etary Policy Report.

Treasury market functioning and liquidity

conditions in the MBS market were generally

stable . . .

Indicators of Treasury market functioning remained

stable amid ongoing reductions in the pace of the

Federal Reserve’s asset purchases over the first half

of 2014. In particular, liquidity conditions in Treas-

ury markets remained stable, with with bid–asked

spreads in the Treasury market staying in line with

recent averages. In addition, the Treasury’s first-ever

auction of a Floating Rate Note in January was well

received, as were subsequent auctions of those notes.

Liquidity conditions in the MBS markets were also

generally stable, though there have been some signs

of scarcity of certain securities, as evidenced by

somewhat low levels of implied financing rates in the

production-coupon “dollar roll” markets during the

first half of this year. However, the implied financing

rates rose in recent days, suggesting easing of settle-

ment pressures in these markets of late.

Gross issu-

Dollar roll transactions consist of a purchase or sale of agency

MBS with the simultaneous agreement to sell or purchase sub-

stantially similar securities on a specified future date. The Fed-

eral Reserve engages in these transactions as necessary to facili-

tate settlement of its agency MBS purchases.

During April and May, the Open Market Desk transitioned pur-

chases of agency MBS to FedTrade, the Desk’s proprietary

trading system that uses multiple-price competitive auctions.

Monetary Policy and Economic Developments 29

ance of these securities remained somewhat lower

than in the past two years, reflecting relatively low

mortgage originations.

. . . and short-term funding markets also

continued to function well

Conditions in short-term dollar funding markets also

remained stable during the first half of 2014. Early in

the year, yields on Treasury bills maturing between

late February and mid-March of 2014—those that

could have been affected by delayed payments if a

debt ceiling agreement had not been reached—were

elevated for a time, but those yields declined in mid-

February in response to news of pending legislation

to suspend the debt ceiling until March 2015. The

federal funds rate remained at very low levels, and

broader measures of unsecured dollar bank funding

costs, such as the LIBOR, or London interbank

offered rate, remain at very low levels, reflecting the

absence of major funding pressures.

Money market participants continued to focus on the

Federal Reserve’s testing of its monetary policy tools.

Daily awards at the overnight reverse repurchase

agreement (ON RRP) exercise have ranged between

about $50 billion and about $340 billion since early

2014. The number of counterparties participating

and the dollar volume of take-up have been sensitive

to the spread between market rates for repurchase

agreements and the fixed ON RRP rate offered in the

exercise.

Indeed, take-up has been large at quarter-

ends, when balance sheet adjustments by financial

institutions tend to limit other investment options.

Experience to date suggests that ON RRP operations

have helped establish a floor on money market inter-

est rates. Testing of the Term Deposit Facility, as well

as take-up of and participation in its test offerings,

has expanded during the first half of 2014. (For fur-

ther discussion of the testing of monetary policy

tools, see the box “

Planning for Monetary Policy

Implementation during Normalization

” on pages

38–39 of the July 2014 Monetary Policy Report.)

The condition of financial institutions improved

further, although profitability remained below its

historical average

Regulatory capital ratios at bank holding companies

(BHCs) increased further during the f irst half of

2014, and measures of bank liquidity remained

robust. In addition, credit quality at BHCs continued

to improve across major loan categories, and the

ratios of loss reserves to delinquencies and to charge-

offs each edged up. At the same time, standard meas-

ures of the profitability of BHCs have been little

changed for the past six months. Profitability of these

companies remained below its historical average, in

part because of subdued income from mortgage and

trading businesses and compressed net interest mar-

gins at large banks. A few large banks have also

incurred sizable costs from legal settlements associ-

ated with the origination of mortgages prior to the

recent financial crisis. Aggregate credit provided by

commercial banks grew at a solid pace in the first

half of 2014. The increase was driven by a pickup in

loan growth and a rise in holdings of U.S. Treasury

securities that was reportedly influenced by banks’

efforts to meet new liquidity regulations. Equity

prices of large domestic banks increased a bit from

the beginning of the year, on net, but underper-

for med the overall market. Credit default swap

(CDS) spreads for large BHCs remain low.

Among nonbank financial institutions, equity prices

of insurance companies have also increased slightly,

on net, since the beginning of the year. Nonbank

financial institutions continued to grow at a very

strong pace, as assets under management at hedge

funds and private equity groups each reached record

highs, reflecting modest increases in asset values as

well as net inflows. Nevertheless, in response to the

Federal Reserve Board’s Senior Credit Officer Opin-

ion Survey on Dealer Financing Terms for March

and June, most dealers indicated that hedge funds

had not changed their use of leverage since the begin-

ning of the year.

In the same survey, some dealers

noted that the use of financial leverage by trading

REITs, or real estate investment trusts, had

decreased, continuing a trend that began in the sum-

mer of 2013. Assets under management at bond

mutual funds also reached a record high.

Municipal bond markets functioned smoothly, but

some issuers remained strained

Credit conditions in municipal bond markets gener-

ally appeared to remain stable over the first half of

the year. Yields on 20-year general obligation munici-

pal bonds have declined slightly since the beginning

of the year, and the MCDX, an index of CDS for a

Fixed-rate ON RRP operations were first authorized by the

FOMC at the September 2013 meeting, and were reauthorized

in January 2014, for the purpose of assessing operational readi-

ness. The Committee authorized the Open Market Desk to con-

duct such operations involving U.S. government securities and

securities that are direct obligations of, or fully guaranteed as to

principal and interest by, any agency of the United States.

The Senior Credit Officer Opinion Survey on Dealer Financing

Terms is available on the Board’s website at

www

.federalreserve.gov/econresdata/releases/scoos.htm.

30 101st Annual Report | 2014

broad portfolio of municipal bonds, has also moved

down. However, the ratio of an index of municipal

bond yields to Treasury yields has increased a bit.

Nevertheless, significant financial strains have been

evident for some issuers. Standard & Poor’s, Moody’s

Investors Service, and Fitch Ratings downgraded

Puerto Rico’s general obligation bonds from invest-

ment grade to speculative grade in February. In addi-

tion, the City of Detroit continues to negotiate the

terms of its bankruptcy plan.

Liquid deposits in the banking sector continued

to advance briskly, boosting M2

M2 has increased at an annual rate of about 7 per-

cent since December, about the same pace registered

in the second half of 2013 and somewhat faster than

the pace of nominal GDP. The growth in M2 has

been driven by an increase in liquid deposits as well

as an uptick in demand for currency.

International Developments

As in the United States, foreign bond yields

declined and asset prices increased, on net . . .

As noted earlier, foreign long-term benchmark sover-

eign yields have moved significantly lower since the

beginning of the year. Factors contributing to the

decline include expectations for lower policy interest

rates, a decline in the required compensation for risk,

and increased demand by price-insensitive investors

for these assets. Similarly, foreign corporate and sov-

ereign yield spreads have also declined since the start

of the year. In particular, peripheral euro-area sover-

eign yield spreads narrowed substantially, on balance,

as financial stresses in the euro area have eased and

central banks in the advanced economies have

emphasized that they will keep monetary policy

accommodative for some time, though spreads in a

few economies have moved up more recently. Sover-

eign yield spreads in EMEs have also declined, on

net, consistent with measures adopted by EME cen-

tral banks to reduce vulnerabilities and with the gen-

eral increase in the prices for risky assets.

Foreign equity indexes rose, on net, during the first

half of the year. Stock prices increased, on balance,

in most of the AFEs. Japanese equities underper-

for med early in the year, but they have moved up

recently on stronger-than-expected incoming eco-

nomic data. And European bank stock prices

declined lately in part on concerns over troubles at

several banks. Equities in most EMEs have also

moved higher, as market sentiment toward these

economies has continued to improve. However, the

Chinese stock market fell on concerns over the eco-

nomic outlook. Realized volatility across most finan-

cial markets and countries has declined since January,

in part as sentiment toward risky assets generally

improved.

. . . and the dollar is about unchanged

The broad nominal value of the dollar is little

changed, on net, since the beginning of the year. The

U.S. dollar appreciated notably against the Chinese

renminbi in the first months of the year. However,

the People’s Bank of China has since kept the value

of the renminbi steady. In contrast, the dollar depre-

ciated against most other emerging market curren-

cies, as financial stresses earlier in the year unwound.

In addition, the dollar depreciated against the British

pound, as macroeconomic conditions improved in

the United Kingdom and markets moved forward

their expectations for the first rate hike by the Bank

of England, and also depreciated against the Japan-

ese yen, as investors reduced their expectations for

stronger policy accommodation in Japan.

Activity in the emerging market economies

slowed in the first quarter but showed signs of

picking up in the second quarter . . .

Aggregate real GDP growth in the EMEs slowed in

the first quarter of this year, led by a step-down in

China’s economy that also weighed on activity in

many of its trading partners, especially in emerging

Asia. The slowing in China reflected a sharp fall in

exports, as well as a restraint on domestic demand

from tighter financial conditions, as the government

attempted to rein in credit. In Mexico, growth

remained weak in the first quarter, likely restrained

by hikes in tax rates and administered fuel prices and

softer U.S. demand for Mexican exports. Brazilian

real GDP rose at a tepid pace in the first quarter,

extending the lackluster performance of the past two

years.

Recent indicators, notably exports, suggest that EME

growth picked up in the second quarter. In particular,

Chinese exports grew robustly in the second quarter,

reversing most of the sharp decline in February, and

the authorities announced a series of small targeted

stimulus measures to support growth. The improve-

ment in Chinese growth, along with firmer growth in

the advanced economies, will help boost global eco-

nomic activity in the rest of emerging Asia. Growth

in Mexico is also expected to step up in the second

Monetary Policy and Economic Developments 31

quarter, in line with U.S. manufacturing output, and

recent data in Brazil point to some, albeit modest,

improvement.

Inflation remained subdued in most EMEs, and cen-

tral banks in some countries, such as Chile, Mexico,

and Thailand, cut rates to support growth. In con-

trast, the central banks of a few EMEs, such as Brazil

and India, where inflation remained elevated, raised

policy rates.

. . . while economic growth in most advanced

foreign economies remained moderate

Indicators suggest that average economic growth in

the AFEs remained moderate in the first half of

2014. The severe winter weather that hampered

growth in the United States also weighed on real

GDP in Canada, where growth slowed to an annual-

ized 1¼ percent pace in the first quarter. However,

data including the purchasing managers index are

consistent with Canadian growth bouncing back in

the second quarter. In Japan, GDP growth surged in

the first quarter at a nearly 7 percent pace, led by

household spending ahead of the April hike in the

Japanese consumption tax, but recent retail sales data

suggest that activity fell back sharply in April. In the

United Kingdom, GDP growth remained robust in

the first quarter at 3¼ percent, and the unemploy-

ment rate fell about 1 percentage point between mid-

2013 and the first quarter of 2014. The euro area’s

recovery continued at a subdued pace—with GDP

rising at an annual rate of around ¾ percent in the

first quarter—and recent indicators point to a firm-

ing in growth in the second quarter as financial and

credit conditions continue to normalize.

Inflation during the first half of the year has been

around 2 percent in Canada and somewhat below

that level in the United Kingdom. In Japan, the April

tax hike as well as rising import prices in response to

recent yen depreciation pushed up the 12-month rate

of consumer price inflation in April. However, infla-

tion excluding taxes remained much lower, and the

Bank of Japan continued its aggressive program of

asset purchases aimed at achieving its inflation target

of 2 percent in a stable manner. In the euro area,

inflation slowed to just ½ percent in May, and the

ECB responded in June by cutting its key policy

rates—taking the deposit rate into negative terri-

tory—and by announcing measures to ease credit

conditions. (For further discussion of monetary

policy at foreign central banks, see the box “

Pros-

pects for Monetary Policy Normalization in the

Advanced Economies” on pages 30–31 of the

July 2014 Monetary Policy Report.)

Part 2: Monetary Policy

To support further progress toward maximum

employment and price stability, monetary policy has

remained highly accommodative. The Federal

Reserve kept the target federal funds rate at its effec-

tive lower bound, updated its forward guidance

regarding the path of the federal funds rate, and

added to its sizable holdings of longer-term securi-

ties, albeit at a reduced pace. The Federal Reserve has

also continued to plan for the eventual normalization

of monetary policy.

The Federal Open Market Committee continued

to use large-scale asset purchases and forward

rate guidance to support further progress toward

maximum employment and price stability

The Committee has continued to judge that a highly

accommodative stance of monetary policy remains

warranted to support progress toward its dual man-

date of maximum employment and price stability.

With the target range for the federal funds rate

remaining at its effective lower bound, the Federal

Open Market Committee (FOMC) has made further

use of nontraditional policy tools to provide appro-

priate monetary stimulus. In particular, the FOMC

has used large-scale asset purchases to put downward

pressure on longer-term interest rates and to ease

financial conditions more broadly so as to promote

the more rapid achievement of its dual objectives. In

addition, the FOMC has provided guidance about

the likely future path of the federal funds rate in an

effort to give greater clarity to the public about its

policy outlook and intentions. In light of the cumula-

tive progress toward its monetary policy objectives

and the outlook for further progress over coming

years, the Committee made adjustments during the

first half of 2014 to both its asset purchase program

and its forward guidance about the path of the fed-

eral funds rate.

The FOMC made further measured reductions in

the pace of its asset purchases . . .

During the first half of 2014, the Committee made

further measured reductions in the pace of its asset

purchases, following the initial modest reduction

announced at the December 2013 meeting.

These

actions reflected the cumulative progress toward

See Board of Governors of the Federal Reserve System (2013),

“Federal Reserve Issues FOMC Statement,” press release,

32 101st Annual Report | 2014

maximum employment and the improvement in the

outlook for labor market conditions since the incep-

tion of the current asset purchase program in the fall

of 2012 as well as the Committee’s judgment that

there was sufficient underlying strength in the

broader economy to support ongoing improvement

in labor market conditions and inflation moving

back toward its longer-run objective.

Specifically, at its four meetings in the first half of

2014, the Committee reduced the monthly pace of its

purchases of agency mortgage-backed securities

(MBS) and of longer-term Treasury securities by

$5 billion each. Accordingly, beginning in July, the

Committee is adding to its holdings of agency MBS

at a pace of $15 billion per month (compared with

$35 billion per month at the beginning of the year)

and is adding to its holdings of longer-term Treasury

securities at a pace of $20 billion per month (com-

pared with $40 billion per month at the beginning of

the year). The FOMC also maintained its existing

policy of reinvesting principal payments from its

holdings of agency debt and agency MBS in agency

MBS and of rolling over maturing Treasury securities

at auction.

While making measured reductions in the pace of its

purchases, the Committee noted that its sizable and

still-increasing holdings of longer-term securities

should maintain downward pressure on longer-term

interest rates, support mortgage markets, and help

make broader financial conditions more accommoda-

tive. More accommodative financial conditions, in

turn, should promote a stronger economic recovery, a

further improvement in labor market conditions, and

a return of inflation, over time, toward the Commit-

tee’s 2 percent objective.

At each of its meetings so far this year, the FOMC

reiterated that it would closely monitor incoming

information on economic and financial develop-

ments, and that it would continue asset purchases

and employ its other policy tools as appropriate until

the outlook for the labor market had improved sub-

stantially in a context of price stability. The Commit-

tee also noted that if incoming information broadly

supports its expectation of ongoing improvement in

labor market conditions and inflation moving back

toward its longer-run objective, it would likely reduce

the pace of asset purchases in further measured steps

at future meetings. However, the Committee also

emphasized that asset purchases are not on a preset

course, and that decisions about their pace would

remain contingent on the Committee’s outlook for

the labor market and inflation as well as its assess-

ment of the likely efficacy and costs of such

purchases.

. . . updated its forward guidance with a

qualitative description of the factors that will

influence its decision to begin raising the federal

funds rate . . .

As 2014 began, the Committee’s forward guidance

included quantitative thresholds, stating that the

exceptionally low target range for the federal funds

rate of 0 to ¼ percent would be appropriate at least

as long as the unemployment rate remained above

6½ percent, inflation between one and two years

ahead was projected to be no more than a half per-

centage point above the Committee’s 2 percent

longer-run goal, and longer-term inflation expecta-

tions continued to be well anchored.

The Commit-

tee also indicated that in determining how long to

maintain a highly accommodative stance of mon-

etary policy, it would consider not only the unem-

ployment rate but also other indicators, including

additional measures of labor market conditions, indi-

cators of inflation pressures and inflation expecta-

tions, and readings on financial developments. Based

on its assessment of these factors, the Committee

noted that it likely would be appropriate to maintain

the current target range for the federal funds rate well

past the time the unemployment rate declines below

6½ percent, especially if projected inflation continues

to run below the Committee’s 2 percent longer-run

goal.

At the time of the March meeting, with the unem-

ployment rate quickly approaching the threshold of

6½ percent, the FOMC decided to update its forward

guidance by providing a qualitative description of the

factors that would influence its decision regarding the

appropriate time of the first increase in the target

federal funds rate from its current 0 to ¼ percent tar-

get range.

The Committee agreed that while reli-

ance on a single indicator—the unemployment rate—

had been useful for communications purposes when

employment conditions were much further from

December 18, www.federalreserve.gov/newsevents/press/

monetary/20131218a.htm

See Board of Governors of the Federal Reserve System (2014),

“Federal Reserve Issues FOMC Statement,” press release, Janu-

ary 29,

www.federalreserve.gov/newsevents/press/monetary/

20140129a.htm

See Board of Governors of the Federal Reserve System (2014),

“Federal Reserve Issues FOMC Statement,” press release,

March 19,

www.federalreserve.gov/newsevents/press/monetary/

20140319a.htm

Monetary Policy and Economic Developments 33

mandate-consistent levels, with labor market condi-

tions improving, the Committee would base its judg-

ment concerning progress in the labor market on a

much broader set of indicators from that point for-

ward. Specifically, the Committee indicated that in

determining how long to maintain the current target

range, it would assess progress—both realized and

expected—toward its objectives of maximum

employment and 2 percent inflation. This assessment

would take into account a wide range of information,

including measures of labor market conditions, indi-

cators of inflation pressures and inflation expecta-

tions, and readings on financial developments. Based

on its assessment of these factors, the Committee

indicated that it likely would be appropriate to main-

tain the current target range for the federal funds rate

for a considerable time after the asset purchase pro-

gram ends, especially if projected inflation continued

to run below the Committee’s 2 percent longer-run

goal and provided that longer-term inflation expecta-

tions remained well anchored. To help forestall misin-

terpretation of the new forward guidance, the Com-

mittee noted that the change in its guidance did not

indicate any change in its policy intentions as set

forth in its recent statements.

. . . and added information regarding the likely

behavior of the target federal funds rate after the

rate is raised above its effective lower bound

The Committee also stated that, when it decides to

begin to remove policy accommodation, it will take a

balanced approach consistent with its longer-run

goals of maximum employment and inflation of

2 percent. In addition, the Committee indicated its

anticipation that, even after employment and infla-

tion are near mandate-consistent levels, economic

conditions may, for some time, warrant keeping the

target federal funds rate below levels the Committee

views as normal in the longer run.

Committee participants have noted that a prolonged

period of low interest rates could lead investors to

take on excessive risk, potentially posing risks to

longer-term financial stability. The Federal Reserve

will continue to monitor the financial system for any

signs of the buildup of such risks and will take

appropriate steps to address such risks as needed (see

the box “

Developments Related to Financial

Stability

” on pages 22–23 of the July 2014 Monetary

Policy Report).

The Committee’s large-scale asset purchases led

to a further increase in the size of the Federal

Reserve’s balance sheet

As a result of the FOMC’s ongoing large-scale asset

purchase program, Federal Reserve assets have

increased further since the end of last year. Holdings

of U.S. Treasury securities in the System Open Mar-

ket Account (SOMA) increased $200 billion to

$2.4 trillion, and holdings of agency debt and MBS

increased $160 billion, on net, to $1.7 trillion.

the liability side of the balance sheet, the increase in

the Federal Reserve’s assets was largely matched by

increases in reserve balances, currency in circulation,

deposits with Federal Reserve banks, and reverse

repurchase agreements.

Given the Federal Reserve’s large and growing bal-

ance sheet, interest income on the SOMA portfolio

continued to support substantial remittances to the

U.S. Treasury. Last year, remittances totaled $80 bil-

lion, and remittances over the first quarter of this

year remained very high. Cumulative remittances to

the Treasury from 2008 through the first quarter of

2014 exceeded $420 billion.

The Federal Reserve continued to plan for the

eventual normalization of monetary policy

At its April meeting, the FOMC discussed issues

associated with the eventual normalization of the

stance and conduct of monetary policy during a

period when the Federal Reserve’s balance sheet will

be very large.

The Committee’s discussion of this

topic was undertaken as part of prudent planning

and did not imply that normalization will begin soon.

The Committee discussed various tools that could be

used to raise short-term interest rates—and to con-

The changes in the par value of SOMA holdings, noted earlier,

can differ from the amount of securities purchased over the

same period, largely because of lags in the settlement of the pur-

chases. Among other assets, the outstanding amount of dollars

provided through the temporary U.S. dollar liquidity swap

arrangements with foreign central banks edged lower since the

end of last year and remains close to zero, reflecting the contin-

ued stability in offshore U.S. dollar funding markets.

See Board of Governors of the Federal Reserve System (2014),

Quarterly Report on Federal Reserve Balance Sheet Developments

(Washington: Board of Governors, May),

www.federalreserve

.gov/monetarypolicy/files/quarterly_balance_sheet_

developments_report_201405.pdf

See Board of Governors of the Federal Reserve System (2014),

“Minutes of the Federal Open Market Committee, April 29–30,

2014,” press release, May 21,

www.federalreserve.gov/

newsevents/press/monetary/20140521a.htm

34 101st Annual Report | 2014

trol the level of short-term interest rates once they

are above the effective lower bound—even while the

balance sheet of the Federal Reserve remains very

large. Those tools included the rate of interest paid

on excess reserve balances, fixed-rate overnight

reverse repurchase agreement (ON RRP) operations,

term reverse repurchase agreements, and the Term

Deposit Facility (TDF). Participants considered how

various combinations of tools could have different

implications for the degree of control over short-term

interest rates, the Federal Reserve’s balance sheet and

remittances to the Treasury, the functioning of the

federal funds market, and financial stability in both

normal times and periods of stress.

At the June FOMC meeting, participants continued

their discussion of normalization issues and consid-

ered some possible strategies for implementing and

communicating monetary policy during that pro-

cess.

Most participants agreed that adjustments in

the rate of interest on excess reserves (IOER) should

play a central role during the normalization process.

It was generally agreed that an ON RRP facility with

an interest rate set below the IOER rate could play a

useful supporting role by helping to firm the floor

under money market interest rates. A few partici-

pants commented that the Committee should also be

prepared to use its other policy tools, including term

deposits and term reverse repurchase agreements, if

necessary. Most participants thought that the federal

funds rate should continue to play a role in the Com-

mittee’s operating framework and communications

during normalization, with many of them indicating

a preference for continuing to announce a target

range. While generally agreeing that an ON RRP

facility could play an important role in the policy

normalization process, participants discussed several

possible concerns about using such a facility, includ-

ing the potential for substantial shifts in investments

toward the facility and away from financial and non-

financial firms in times of financial stress, the poten-

tial expansion of the Federal Reserve’s role in finan-

cial intermediation, and the extent to which mon-

etary policy operations might be conducted with

nontraditional counterparties. Participants discussed

design features that could help address these con-

cerns. Several participants emphasized that, although

the ON RRP rate would be useful in controlling

short-term interest rates during normalization, they

did not anticipate that such a facility would be a per-

manent part of the Committee’s longer-run operat-

ing framework. Overall, participants generally

expressed a preference for a simple and clear

approach to normalization, and it was observed that

it would be useful for the Committee to develop its

plans and communicate them to the public later this

year, well before the first steps in normalizing policy

become appropriate, and to maintain flexibility about

the evolution of the normalization process as well as

the Committee’s longer-run operating framework.

The Federal Reserve has continued to test the opera-

tional readiness of its policy tools, conducting daily

ON RRP operations and several tests of the TDF

during the first half of 2014. To date, testing has pro-

gressed smoothly, and, in recent months, short-term

market rates have generally traded above the ON

RRP rate. (For more discussion of the Federal

Reserve’s preparations for the eventual normalization

of monetary policy, see the box “

Planning for

Monetary Policy Implementation during

Normalization

” on pages 38–39 of the July 2014

Monetary Policy Report.)

See Board of Governors of the Federal Reserve System (2014),

“Minutes of the Federal Open Market Committee, June 17–18,

2014,” press release, July 9,

www.federalreserve.gov/newsevents/

press/monetary/20140709a.htm

Monetary Policy and Economic Developments 35

Financial Stability

A primary objective of the Federal Reserve since its

inception has been the promotion of financial stability

(

box 1). As the U.S. and global financial systems have

evolved, the Federal Reserve’s role in helping main-

tain financial system stability has necessarily adapted.

The Dodd-Frank Wall Street Reform and Consumer

Protection Act of 2010 (Dodd-Frank Act), for

example, explicitly assigned the Federal Reserve new

responsibilities for promoting financial stability. A

central element in the Dodd-Frank Act is the require-

ment that the Federal Reserve and other financial

regulatory agencies adopt a macroprudential

approach to supervision and regulation. Whereas a

traditional—or microprudential—approach to super-

vision and regulation focuses on the safety and

soundness of individual institutions, the macropru-

dential approach centers on the stability of the finan-

cial system as a whole.

In particular, the macroprudential approach informs

the supervision of systemically important financial

institutions—including large bank holding companies

(BHCs), the U.S. operations of certain foreign bank-

ing organizations (FBOs), and financial market utili-

ties (FMUs). In addition, the Federal Reserve serves

as a “consolidated supervisor” of nonbank financial

companies that have been designated by the Financial

Stability Oversight Council (FSOC) as institutions

whose distress or failure could pose a threat to the

stability of the U.S. financial system as a whole (see

“

Financial Stability Oversight Council Activities”

later in this section).

Furthermore, the changing nature of risks and fluc-

tuations in financial markets and the broader

economy require timely monitoring of conditions in

domestic and foreign financial markets, among finan-

cial institutions, and in the nonfinancial sector in

order to identify the buildup of vulnerabilities that

might require further study or policy action.

Promotion of financial stability strongly comple-

ments the primary goals of monetary policy—price

stability and full employment. A smoothly operating

financial system promotes the efficient allocation of

Box 1. Financial Stability and the Founding of the Federal Reserve

In 2014, the Federal Reserve marked the centennial

anniversary of its activities since the passage of the

Federal Reserve Act in 1913. Financial stability con-

siderations were a key element in the founding of

the System. Indeed, the Federal Reserve was cre-

ated in response to the Panic of 1907, the latest in a

series of severe financial panics that befell the

nation in the late 19th and early 20th centuries.

This panic led to the creation of the National Mon-

etary Commission, whose 1911 report was a major

impetus to the Federal Reserve Act, signed into law

by President Woodrow Wilson on December 23,

1913. Upon enactment, the process of organizing

and opening the Board and the Reserve Banks

across the country began. On November 16, 1914,

the Federal Reserve System began full-fledged

operations.

In the words of one author of the Federal Reserve

Act, U.S. Senator Robert Latham Owen of Okla-

homa, “It should always be kept in mind that . . . it is

the prevention of panic, the protection of our com-

merce, the stability of business conditions, and the

maintenance in active operation of the productive

energies of the nation which is the question of vital

importance.”

The Federal Reserve has continued to

serve this function and adapt to U.S. and global

economic and financial system evolution, innovation,

conditions, and dynamics.

See Robert L. Owen (1919), The Federal Reserve Act: Its Origin

and Principles

(New York: Century Company), pp. 43–44.

saving and investment, facilitating economic growth

and employment. And price stability contributes not

only to the efficient allocation of resources in the real

economy, but also to reduced uncertainty and effi-

cient pricing in financial markets, thereby supporting

financial stability.

This section discusses key financial stability activities

undertaken by the Federal Reserve in 2014, which

include monitoring risks to financial stability; macro-

prudential supervision and regulation of large, com-

plex financial institutions; and domestic and interna-

tional cooperation and coordination.

Some of these activities are also discussed elsewhere

in this annual report. A broader set of economic and

financial developments are discussed in

section 2,

“Monetary Policy and Economic Developments,”

with the discussion that follows concerning surveil-

lance of economic and financial developments

focused on financial stability. The full range of activi-

ties associated with supervision of systemically

important financial institutions, designated nonbank

companies, and designated FMUs is discussed in

sec-

tion 4

, “Supervision and Regulation.”

Monitoring Risks to

Financial Stability

Financial institutions are linked together through a

complex set of relationships. Moreover, the condition

of financial institutions and financial stability

depends on the economic condition of the nonfinan-

cial sector, whose borrowing from the financial sector

implies that the strength of financial institutions’ bal-

ance sheets depends on the condition of the nonfi-

nancial sector. As a result, research on financial sta-

bility has been an important part of Federal Reserve

efforts in pursuit of overall economic stability (see

box 2 for information on recent research).

In order to understand the interaction among these

factors and consider appropriate policy responses,

the Federal Reserve maintains a flexible, forward-

looking financial stability monitoring program to

help inform policymakers of the financial system’s

vulnerabilities to a range of potential adverse events

or shocks. Such a monitoring program is a critical

part of a broader program in the Federal Reserve

System to assess and address vulnerabilities in the

U.S. f inancial system.

Each quarter, Federal Reserve Board staff systemati-

cally assess a standard set of vulnerabilities relevant

for financial stability: asset valuations and risk appe-

tite, leverage in the financial system, liquidity risks

and maturity transformation by the financial system,

and borrowing by the nonfinancial sector (house-

holds and nonfinancial businesses). These monitor-

ing efforts inform internal discussions concerning

both macroprudential supervision and regulatory

policies and monetary policy. They also inform Fed-

eral Reserve interactions with broader monitoring

efforts, such as those by the FSOC and the Financial

Stability Board (FSB).

The more specific discussion that follows focuses on

a subset of the most important developments over

the course of 2014 concerning specific indicators,

including asset valuations and risk appetite, leverage,

maturity and risk transformation, and nonfinancial-

sector borrowing.

Asset Valuations and Risk Appetite

Overvalued assets constitute a fundamental vulner-

ability because the unwinding of high prices can be

destabilizing, especially if the assets are widely held

and the values are supported by excessive leverage,

maturity transformation, or risk opacity.

Moreover, stretched asset valuations may be an indi-

cator of a broader buildup in risk-taking. Nonethe-

less, it is very difficult to judge whether an asset price

is overvalued relative to fundamentals. As a result,

analysis typically considers a range of possible valua-

tion metrics, developments in areas in which asset

prices are rising especially rapidly or into which

investor flows have been considerable, or the implica-

tions of unusually low or high levels of volatility in

certain markets.

Looking across markets, valuation pressures were

notable or building in several areas. Over the course

of 2014, yields fell in investment-grade and in the

upper end of the speculative-grade corporate debt

markets, and yields on corporate debt are historically

low. A key contributing factor to the decline in cor-

porate bond yields over 2014 was the sizable decline

in U.S. Treasury yields over the year (

figure 1).

Spreads relative to Treasury yields, a gauge of the

compensation investors demand as compensation for

exposure to the credit risk associated with riskier cor-

porate borrowers, rose somewhat in late 2014 from

low levels and suggested moderate valuation pressure

in corporate bonds overall. The spread on high-yield

38 101st Annual Report | 2014

bonds widened more notably than that on

investment-grade corporate bonds.

Some of this widening in spreads ref lected increased

concerns about the ability of firms in the energy sec-

tor to repay their borrowing in light of the sharp

decline in the price of oil over the second half of the

year. Despite the widening in spreads over Treasury

securities, valuation pressures appeared notable in

riskier corporate debt markets. Issuance of high-yield

bonds remained high in 2014, as did issuance of lev-

eraged loans (

figure 2)—although the pace of issu-

nce slowed late in the year.

As a result, the level of such risky debt grew more

than 10 percent in 2014, the third year of growth in

excess of 10 percent. In addition, the underwriting

quality of leveraged loans arranged or held by bank-

ing institutions remained relatively weak in 2014,

although there may have been some improvement late

in the year in response to supervisory enforcement of

the 2013 guidance for leveraged lending. For

example, debt multiples over earnings on new deals

remain high relative to historical averages but

decreased somewhat, on balance, in the fourth quar-

ter of 2014. Even so, the increase in borrowing and

loose standards for lending over recent years could

imply that investors in high-yield bonds and lever-

aged loans are exposed to larger risks of low returns

or losses in coming years, and the growth in debt

among lower-rated corporations may place strains on

these firms, especially if macroeconomic conditions

turn out to be weaker than expected. Indeed, as

described in more detail later, the 2015 round of Fed-

eral Reserve stress testing explored the potential

strains on participating institutions that could stem

from a large deterioration in the credit quality of

risky corporate borrowers in its severely adverse

scenario.

The commercial real estate market exhibited growing

valuation pressures over the course of 2014. Prices

have risen relative to rents, and lending standards

have eased. There have also been indications of

weakening in underwriting standards in securitiza-

tions, such as an increased share of interest-only

loans and rising loan-to-value ratios in commercial

mortgage-backed securities (CMBS) pools. However,

unlike corporate debt more broadly, the volume of

commercial real estate debt outstanding has begun to

accelerate appreciably only over the past year.

In other markets, valuation pressures appear moder-

ate. Broad measures of equity prices rose about

10 percent over the course of 2014, but the equity

premium, measured as the gap between the expected

return on equity and the real long-term Treasury

yield, is estimated to have remained relatively wide.

However, equity prices were high relative to aggregate

sales, reflecting high profit margins. In addition, resi-

dential real estate valuations appear within historical

norms. For example, house prices relative to rents—

one measure of valuations—have remained well

Figure 1. Bond yields, 2010–15

2010 2011

2012

2013 2014

2015

High-yield

Triple-B

10-year Treasury

Daily

Percent

Mar.

Source: Staff estimates of smoothed corporate yield curves based on data from

BofA Merrill Lynch Global Research, used with permission, and smoothed

Treasury yield curve.

Figure 2. Leveraged loan and high-yield bond issuance,

2004–14

2004 2006 2008 2010 2012 2014

High-yield bonds (left scale)

Leveraged loans (left scale)

Total outstanding (right scale)

Four-quarter percent changeBillions of dollars (annual rate)

1600

1400

1200

1000

800

600

400

200

Note: Total outstanding is quarterly data. Data include bonds and loans to both

financial and nonfinancial companies, as well as unrated bonds and loans.

Source: Standard & Poor’s Leveraged Commentary & Data (LCD); Mergent Corpo-

rate Fixed Income (FISD). S&P and its third-party information providers expressly

disclaim the accuracy and completeness of the information provided to the Board,

as well as any errors or omissions arising from the use of such information. Fur-

ther, the information provided herein does not constitute, and should not be used

as, advice regarding the suitability of securities for investment purposes or any

other type of investment advice.

Financial Stability 39

within a typical range and remain far below the levels

seen in the past decade across much of the country

(

figure 3).

Leverage in the Financial System

The financial strength of the banking sector has con-

tinued to improve. Both the ratio of Tier 1 common

equity to risk-weighted assets and the leverage ratio

have risen to levels far above those seen in the mid-

2000s (

figure 4). The increase in capital reflects the

tougher standards implemented globally as part of

the Basel III process and additional efforts imple-

mented following the passage of the Dodd-Frank

Act, including more stringent standards and the

annual stress tests for larger banking organizations.

As a result of steady improvements in capital posi-

tions since the financial crisis, U.S. banks, in aggre-

gate, appear to be better positioned to absorb poten-

tial shocks, such as those related to litigation, falling

oil prices, and financial contagion stemming from

abroad.

Securitization, which continues to be an important

means of financing for several asset classes, remains

relatively subdued, though issuance of non-agency

CMBS and collateralized loan obligations (CLOs)

continued to be robust amid continued reports of

relatively accommodative underwriting standards for

the underlying assets. Recent results from the Federal

Reserve’s Senior Credit Officer Opinion Survey on

Dealer Financing Terms indicate that the use of

financial leverage by institutional investor clients to

fund the purchases of securities was little changed

over recent quarters, although demand for funding

non-agency residential mortgage-backed securities

and high-yield bonds has been rising recently.

Liquidity Risks and Maturity

Transformation by the Financial System

Bank balance sheets show continued improvement in

liquidity positioning as the largest BHCs transition

to Basel III liquidity requirements. The Basel III

liquidity coverage ratio (LCR) requirement began

phasing in for U.S. BHCs with greater than $250 bil-

lion in consolidated assets on January 1, 2015, and

will take full effect in January 2017. In January 2016,

a “modified” LCR requirement for BHCs with

between $50 billion and $250 billion in assets will

begin to be phased in.

Against this backdrop, balance sheet data through

2014:Q4 show the ratio of high-quality liquid assets

to total assets at large- and medium-sized BHCs con-

tinued to grow (

figure 5).

Short-term wholesale funding remained subdued

throughout 2014. Net overnight borrowing at broker-

dealers against fixed-income securities continued to

trend down (

figure 6).

The total outstanding dollar values of commercial

paper and money market mutual funds (MMFs) were

relatively unchanged in 2014. Structural vulnerabili-

ties at MMFs persist: In particular, prime MMFs are

The Senior Credit Officer Opinion Survey on Dealer Financing

Terms is available on the Board’s website at

www.federalreserve

.gov/econresdata/releases/scoos.htm

Figure 3. Ratio of prices to rents, 1990–2015

Jan. 2010 = 100

Monthly

United States

Median

Interquartile range

Jan.

1991 1995 1999 2003 2007 2011 2015

180

160

140

120

100

Note: Percentiles are based on 25 metropolitan statistical areas.

Source: For house prices, CoreLogic; for rent data, Bureau of Labor Statistics.

Figure 4. Regulatory capital ratios, CCAR bank holding

companies, 2001–14

Gross ratio

Tier 1 common

Leverage ratio

Quarterly, S.A.

2002 2004 2006 2008 2010 2012 2014

Note: The shaded bars indicate periods of business recession as defined by the

National Bureau of Economic Research. CCAR is Comprehensive Capital Analysis

and Review.

Source: Federal Reserve Board, FR Y-9C, Consolidated Financial Statements for

Bank Holding Companies.

40 101st Annual Report | 2014

vulnerable to investor runs if a drop in the credit

quality of their assets or a decline in the willingness

of market participants to bear credit risk induces a

fall in the market value of their assets. The U.S. Secu-

rities and Exchange Commission (SEC) rules that

will require institutional prime MMFs to move from

a fixed to a floating net asset value starting in 2016

may mitigate their susceptibility to runs. The SEC

will monitor the effects of the new rules after they are

implemented.

There are signs that the structure of some asset mar-

kets is changing due to changes in broker-dealer

activities and increased trading speeds that are con-

tributing to a buildup of liquidity risks in some mar-

kets. In addition, the growth of bond mutual funds

and exchange-traded funds (ETFs) in recent years

means that these funds now hold a much higher frac-

tion of the available stock of relatively less liquid

assets—such as high-yield corporate debt, bank

loans, and international debt—than they did before

the financial crisis. It is possible that, because mutual

funds and ETFs may appear to offer greater liquidity

than the markets in which they transact, their growth

heightens the potential for a forced sale in the under-

lying markets if some event were to trigger large vol-

umes of redemptions. This possibility—among other

potential vulnerabilities—was the subject of a recent

request for comments from the public issued by the

FSOC (see “Financial Stability Oversight Council

Activities

” later in this section).

Borrowing by the Nonfinancial Sector

Excessive borrowing by the private nonfinancial sec-

tor has been an important contributor to financial

crises. Highly indebted households and nonfinancial

businesses may have a difficult time withstanding

negative shocks to incomes or asset values and may

be forced to curtail spending in ways that amplify the

effects of financial shocks. In turn, losses among

households and businesses can lead to mounting

losses at financial institutions, creating an “adverse

feedback loop” in which weakness among house-

holds, nonfinancial businesses, and financial institu-

tions causes further declines in income and financial

losses, potentially leading to financial instability and

a sharp contraction in economic activity.

Borrowing by households remained relatively sub-

dued through the fourth quarter of 2014. At the

same time, borrowing by the nonfinancial business

sector has grown only moderately. As a result, the

ratio of household and nonfinancial business credit

to nominal GDP has remained significantly below

the peak seen in the 2000s (

figure 7). Nonetheless,

this ratio remains above levels seen prior to the

mid-2000s.

Within the household sector, the level of borrowing

has edged up among households with strong credit

histories, while borrowing by households with dam-

Figure 5. Ratio of high-quality liquid assets to total assets,

2010–14

Percent

Large (>$250B total assets or >$10B foreign assets)*

Medium ($50B–$250B)**

Quarterly

2010 2011 2012 2013 2014

* Bank holding companies (BHCs) subject to the full liquidity coverage ratio (LCR)

rule.

** BHCs subject to modified LCR rule.

Source: High-quality liquid assets estimated using quarter-end balances reported

in filings of Federal Reserve Board reporting forms FR Y-9C (Consolidated Finan-

cial Statements for Bank Holding Companies) and FR 2900 (Report of Transaction

Accounts, Other Deposits, and Vault Cash).

Figure 6. Primary dealer net borrowing, by maturity,

2001–14

Weekly

Billions of dollars

Revised survey

Net overnight borrowing

Net term borrowing

Dec.

Net borrowingNet lending

2002 2004 2006 2008 2010 2012 2014

2500

2000

1500

1000

500

-500

-1000

-1500

Note: Term financing refers to agreements with an original fixed maturity of more

than one business day. Overnight financing refers to agreements with an original

fixed maturity of one business day and agreements with no specific maturity that

can be terminated on demand by either the borrower or lender. Net borrowing is

the difference between funds received (borrowing) and funds paid (lending).

Source: Federal Reserve Board, FR 2004C, Weekly Report of Dealer Financing and

Fails.

Financial Stability 41

Box 2. 2014 Research on Financial Stability

The macroprudential approach to ensuring financial

stability builds on a substantial and growing body of

research on the factors that lead to vulnerabilities in

the financial system and how policies can mitigate

such risks.

It remains the case, however, that understanding of

the array of factors important for financial stability is

incomplete and evolving. As a result, the Federal

Reserve engages actively in financial stability

research. This research seeks to improve under-

standing of related issues, engages the broader

research community in policy issues, and often

involves collaboration with academia and research-

ers at other domestic and international institutions.

Finally, research efforts by Federal Reserve staff

reflect their attempts to identify and grapple with top-

ics of concern to the Federal Reserve, and the

views expressed are those of the individual authors

and not those of the Federal Reserve. Examples of

research on financial stability in 2014 include the

following:

•

Tracking time-varying sources of systemic

risk. A research note presenting a forward-looking

monitoring program to identify and track time-

varying sources of systemic risk. The program dis-

tinguishes between shocks, which are difficult to

prevent, and the vulnerabilities that amplify

shocks, which can be addressed. Drawing on a

substantial body of research, the authors identify

leverage, maturity transformation, interconnected-

ness, complexity, and the pricing of risk as the pri-

mary vulnerabilities in the financial system. The

monitoring program tracks these vulnerabilities in

four sectors of the economy: asset markets, the

banking sector, shadow banking, and the nonfi-

nancial sector. The framework also highlights the

policy tradeoff between reducing systemic risk and

raising the cost of financial intermediation by tak-

ing preemptive actions to reduce vulnerabilities.

•

Spillovers between distress among sovereigns

and banks. A working paper examining the trans-

mission channels between sovereigns and banks,

with a focus on the effect of sovereign distress on

bank solvency and financing. It also highlights the

notable cost to the real economy of the close con-

nection between sovereigns and banks.

•

Systemic risk and policy actions. A working

paper studying the impact of capital injections on

the systemic risk in the banking sector in the

United States and the euro area.

•

Capital and liquidity regulation. A working paper

studying the interaction of capital and liquidity

regulation in a macroeconomic model.

•

Lender of last resort in the 2007–09 crisis. A

working paper studying lender-of-last-resort

actions during the recent financial crisis.

•

Capital and liquidity reforms and Basel III. Two

published journal articles studying the effects of

capital reforms, liquidity reforms, or both that are

similar to those associated with the Basel III pro-

cess on economic activity in the medium and long

run.

See Tobias Adrian, Daniel Covitz, and Nellie Liang (2014),

“Financial Stability Monitoring,” FEDS

Notes (Washington: Board

of Governors of the Federal Reserve System, August), www

.federalreserve.gov/econresdata/notes/feds-notes/2014/financial-

stability-monitoring-20140804.html.

See Ricardo Correa and Horacio Sapriza (2014), “Sovereign

Debt Crises,” International Finance Discussion Papers 2014-

1104 (Washington: Board of Governors of the Federal Reserve

System, May), www.federalreserve.gov/pubs/ifdp/2014/1104/

ifdp1104.pdf.

See Juan M. Londono and Mary Tian (2014), “Bank Interven-

tions and Options-Based Systemic Risk: Evidence from the

Global and

Euro-Area Crisis,” International Finance Discussion

Papers 2014-1117 (Washington: Board of Governors of the

Fed-eral Reserve System, September), www.federalreserve.gov/

econresdata/ifdp/2014/files/ifdp1117.pdf.

See Francisco Covas and John C. Driscoll (2014), “Bank Liquid-

ity and Capital Regulation in General Equilibrium,” Finance and

Economics Discussion Series 2014-85 (Washington: Board of

Governors of the Federal Reserve System, September), www

.federalreserve.gov/econresdata/feds/2014/files/201485pap.pdf.

See Dietrich Domanski, Richhild Moessner, and William Nelson

(2014), “Central Banks as Lender of Last Resort: Experiences

during the 2007-2010 Crisis and Lessons for the Future,”

Finance and Economics Discussion Series 2014-110 (Washing-

ton: Board of Governors of the Federal Reserve System, May),

www.federalreserve.gov/econresdata/feds/2014/files/2014110pap

.pdf.

See Michael T. Kiley and Jae W. Sim (2014), “Bank Capital and

the Macroeconomy: Policy Considerations,”

Journal of Economic

Dynamics and Control, vol. 43 (June), pp. 175–98, doi: 10.1016/

j.jedc.2014.01.024; and Paolo Angelini, Laurent Clerc, Vasco

Cúrdia, Leonardo Gambacorta, Andrea Gerali, Alberto Locarno,

Roberto Motto, Wermer Roeger, Skander Van den Heuvel, and

Jan Vlek (2015), “Basel III: Long-Term Impact on Economic

Performance and Fluctuations,” Manchester School, vol. 83

(March), pp. 217–51, doi: 10.1111/manc.12056.

42 101st Annual Report | 2014

aged credit histories—so-called subprime borrow-

ing—contracted further, in the aggregate, in 2014.

The combination of anemic growth in borrowing in

the aggregate and the tendency for such growth to

represent borrowing by households with strong credit

histories suggests that vulnerabilities from household

borrowing did not rise in 2014. Nonetheless, pockets

of household credit markets witnessed a shift toward

borrowing in riskier credit segments—for example, in

subprime auto lending—a trend that should be

monitored.

In the business sector, the rapid growth in borrowing

in riskier segments of corporate debt markets, high-

lighted in the discussion of asset valuations earlier,

has led to a notable increase in leverage—that is, debt

relative to book equity—among speculative-grade

corporations (

figure 8).

Macroprudential Supervision of

Large, Complex Financial Institutions

Large, complex financial institutions interact with

financial markets and the broader economy in a

manner that may—during times of stress and in the

absence of an appropriate regulatory framework and

effective supervision—lead to financial instability.

Key Supervisory Activities

One important element of enhanced supervision of

large banking organizations is the stress-testing pro-

cess, which includes the Dodd-Frank Act stress tests

and the Comprehensive Capital Analysis and Review.

In addition to fostering the safety and soundness of

the participating institutions, stress tests embed mac-

roprudential elements by

•

examining the loss-absorbing capacity of institu-

tions under a common macroeconomic scenario

that has features similar to the strains experienced

in a severe recession and which includes, as appro-

priate, identified salient risks;

•

conducting horizontal testing across large institu-

tions to understand the potential correlated expo-

sures; and

•

considering the effects of counterparty distress on

the largest, most interconnected firms.

The macroeconomic and financial scenarios that are

used in the stress tests have proved to be an impor-

tant macroprudential tool. As described in the 2013

policy statement on developing scenarios for stress

tests, the Federal Reserve adjusts the severity of the

macroeconomic scenario in a way that counteracts

the natural tendency for risks to build within the

For more on the Federal Reserve’s supervision and regulation of

large institutions, and especially related to the integration of the

microprudential objective of safety and soundness of individual

institutions with the macroprudential efforts outlined later in

this section, see

section 4, “Supervision and Regulation.”

Figure 7. Ratio of nonfinancial sector credit to GDP,

1980–2014

1984 1989 1994 1999 2004 2009 2014

2.0

1.6

1.2

0.8

0.4

Quarterly

Ratio

Household

Business

Note: The shaded bars indicate periods of business recession as defined by the

National Bureau of Economic Research.

Source: Federal Reserve Board, Statistical Release Z.1, “Financial Accounts of the

United States.”

Figure 8. Speculative-grade and unrated firm net leverage,

1995–2014

1996 1999 2002

2005

2008 2011

2014

Quarterly

Percent

Note: Data are annual until 1999 and quarterly thereafter. Net leverage is the ratio

of the book value of total debt minus cash and cash equivalents to the book value

of total assets.

and/or reproduction permitted.

Financial Stability 43

financial system during periods of strong economic

activity.

The scenarios can also be used to assess the

financial system’s vulnerability to particularly signifi-

cant risks and to highlight certain risks to institutions

participating in the testing.

In a severely adverse sce-

nario for 2015 (released in October 2014), the U.S.

corporate sector experiences increases in financial

distress that are even larger than would be expected

in a severe recession.

This deterioration in credit

quality is particularly concentrated in riskier firms.

Investors pull back from a variety of assets linked to

risky corporate borrowers and, in particular, highly

leveraged corporations. Spreads on assets linked to

these corporations, particularly high-yield bonds, lev-

eraged loans, and CLOs backed by leveraged loans,

widen to the same levels as the peaks reached in the

2007–09 recession. These developments were moti-

vated, in part, by the rapid growth in debt owed by

risky firms and valuation pressures observed in

related markets that were highlighted earlier in this

section.

The Federal Reserve incorporates a macroprudential

approach, too, in its supervision of FMUs. In 2014,

the Federal Reserve Board updated its risk-

management expectations for FMUs. For designated

FMUs for which the Board or another federal bank-

ing agency serves as the supervisory agency under

title VIII of the Dodd-Frank Act, the Board

amended its risk-management standards to take into

account new international standards for such entities

(effective December 2014).

As with other elements of supervision, a more thor-

ough review of activities in 2014 is discussed in

sec-

tion 4

, “Supervision and Regulation.”

Key Regulatory Activities

Over the course of 2014, the Federal Reserve has

taken a number of steps to continue improving the

resiliency of the financial system, including approval

of a final rule establishing enhanced prudential stan-

dards with respect to capital, liquidity, and risk man-

agement for large U.S. BHCs and FBOs (pursuant to

section 165 of the Dodd-Frank Act).

The enhanced prudential standards, together with

stress testing and other regulatory safeguards, help

ensure that large U.S. BHCs and FBOs operating in

the United States have robust levels of capital and

liquidity and strong risk management. Together, these

efforts not only help ensure that these firms are finan-

cially robust individually, but also limit the risk that

financial distress at these firms could cause negative

spillovers to the financial sector and the broader

economy. They are complemented by new rules and

proposals concerning liquidity coverage ratios and

strengthened capital requirements for global systemi-

cally important financial institutions, including pro-

posed higher capital requirements for institutions more

reliant on wholesale short-term funding. For more

information on enhanced prudential standards activity,

see

section 4, “Supervision and Regulation.”

During the 2007–09 financial crisis, the lack of effec-

tive resolution strategies contributed to the perni-

cious spillovers of distress at or between individual

institutions and from those institutions to the

broader economy. The Federal Reserve, in collabora-

tion with other U.S. agencies, has continued to work

with large financial institutions to develop a range of

recovery and resolution strategies in the event of

their distress or failure. Improvements in resolution

planning will mitigate adverse effects from percep-

tions of “too big to fail” and contribute to more

orderly conditions in the financial system if institu-

tions face strains. For more information on recovery

and resolution planning activity, see

section 4,

“Supervision and Regulation.”

Domestic and International

Cooperation and Coordination

The Federal Reserve cooperated or coordinated with

both domestic and international institutions in

2014 to promote financial stability.

Financial Stability Oversight

Council Activities

As mandated by the Dodd-Frank Act, the FSOC was

created in 2010 and is chaired by the Treasury Secre-

tary (

box 3). It establishes an institutional framework

See Board of Governors of the Federal Reserve System (2013),

“Federal Reserve Board Issues Final Policy Statement for Devel-

oping Scenarios for Future Capital Planning and Stress Testing

Exercises,” press release, November 7,

www.federalreserve.gov/

newsevents/press/bcreg/20131107a.htm

In 2014, 30 institutions participated in these stress tests. For

more information, see “Stress Tests and Capital Planning” on

the Federal Reserve Board’s website at

www.federalreserve.gov/

bankinforeg/stress-tests-capital-planning.htm

See Board of Governors of the Federal Reserve System (2014),

2015 Supervisory Scenarios for Annual Stress Tests Required

under the Dodd-Frank Act Stress Testing Rules and the Capital

Plan Rule (Washington: Board of Governors, October),

www

.federalreserve.gov/newsevents/press/bcreg/bcreg20141023a1

.pdf

44 101st Annual Report | 2014

for identifying and responding to sources of systemic

risk. The Federal Reserve Chairman, along with

other financial regulators, is a member of the FSOC.

Through collaborative participation in the FSOC,

U.S. f inancial regulators monitor not only institu-

tions, but the financial system as a whole. The Fed-

eral Reserve plays an important role in this macro-

prudential framework: It assists in monitoring finan-

cial risks, analyzes the implications of those risks for

financial stability, and identifies steps that can be

taken to mitigate those risks. In addition, when an

institution is designated by the FSOC as systemically

important, the Federal Reserve assumes responsibil-

ity for supervising that institution.

In 2014, the Federal Reserve worked, in conjunction

with other FSOC participants, on several major

initiatives:

•

Conference examining asset management industry.

On May 19, 2014, the FSOC held a conference

examining the asset management industry and its

relationship to financial stability. Participants

included staff from U.S. government agencies, the

private sector (including individuals from the asset

management industry), and academic participants,

among others.

•

Roundtable on designation process. On November 12,

2014, the FSOC hosted a roundtable to discuss pos-

sible improvements to the process for designating

systemically important financial institutions.

•

Request for public comments on asset management

industry risks. On December 18, 2014, as part of its

ongoing analysis of potential risks to the financial

system posed by the asset management industry,

the FSOC released a notice seeking public com-

ment about potential risks to the system associated

with certain products and activities in the asset

management industry relating to liquidity and

redemptions, leverage, operational functions, and

resolution.

•

Determination of an additional systemically impor-

tant entity. On December 19, 2014, the FSOC

announced its final determination to designate

MetLife as a systemically important nonbank

financial company. The determination was based

on the FSOC’s assessment that material financial

distress at MetLife could pose a threat to the finan-

cial stability of the United States.

Financial Stability Board Activities

The Federal Reserve participates in international

bodies, such as the FSB, given the interconnected

global financial system and the global activities of

large U.S. financial institutions.

The FSB is an international body that monitors the

global financial system and promotes the adoption of

sound policies across countries, with much activity in

recent years focused on financial stability. The Fed-

eral Reserve participates in the FSB, along with the

SEC and the U.S. Treasury.

In 2014, the Federal Reserve continued its active par-

ticipation in the FSB. The FSB is engaged in several

issues, including shadow banking, supervision of

global systemically important financial institutions,

and the development of effective resolution regimes

for large financial institutions.

For more information, see U.S. Department of the Treasury

(2014), “Financial Stability Oversight Council Announces Non-

bank Financial Company Designation,” press release, Decem-

ber 19,

www.treasury.gov/press-center/press-releases/Pages/

jl9726.aspx

See the Financial Stability Board website at www

.financialstabilityboard.org

Box 3. Regular Reporting on

Financial Stability Oversight Council

Activities

The Financial Stability Oversight Council (FSOC),

created under the Dodd-Frank Wall Street Reform

and Consumer Protection Act of 2010 and chaired

by the Secretary of the Treasury Department, meets

regularly to coordinate on financial stability topics

that potentially affect the U.S. economy and dis-

closes its activities.

•

Monthly meeting minutes. In 2014, the FSOC

met monthly, and the minutes for each meeting

are available on the U.S Treasury website (

www

.treasury.gov/initiatives/fsoc/council-meetings/

Pages/meeting-minutes.aspx

•

FSOC annual report. On May 7, 2014, the

FSOC released its fourth annual report (

www

.treasury.gov/initiatives/fsoc/studies-reports/

Pages/2014-Annual-Report.aspx

), which

includes a review of key developments through

the beginning of 2014 and a set of recom-

mended actions that could be taken to ensure

financial stability and to mitigate systemic risks

that affect the economy.

For more on the FSOC, see

www.treasury.gov/

initiatives/fsoc/pages/home.aspx

Financial Stability 45

Supervision and

Regulation

The Federal Reserve has supervisory and regulatory

authority over a variety of financial institutions and

activities with the goal of promoting a safe, sound,

and stable financial system that supports the growth

and stability of the U.S. economy. As described in

this report, the Federal Reserve carries out its super-

visory and regulatory responsibilities and supporting

functions primarily by

•

promoting the safety and soundness of individual

financial institutions supervised by the Federal

Reserve;

•

taking a macroprudential approach to the supervi-

sion of the largest, most systemically important

financial institutions (SIFIs);

•

developing supervisory policy (rulemakings, super-

vision and regulation letters (SR letters), policy

statements, and guidance);

•

identifying requirements and setting priorities for

supervisory information technology initiatives;

•

ensuring ongoing staff development to meet evolv-

ing supervisory responsibilities;

•

regulating the U.S. banking and financial structure

by acting on a variety of proposals; and

•

enforcing other laws and regulations.

2014 Developments

During 2014, the U.S. banking system and financial

markets continued to improve following their recov-

ery from the financial crisis that started in mid-2007.

Performance of bank holding companies. An improve-

ment in bank holding companies’ (BHCs) perfor-

mance was evident during 2014. U.S. BHCs, in aggre-

gate, reported earnings approaching an all-time high—

$139 billion for 2014, up from $138 billion for the year

ending December 31, 2013. The proportion of unprof-

itable BHCs continues to decline, reaching 4 percent,

down from 6 percent in 2013, but remains elevated

compared to historical rates; unprofitable BHCs now

encompass less than 1 percent of banking industry

assets, in line with historical norms. Net interest mar-

gin continues to decline, reaching 2.2 percent, the low-

est level in over 20 years. Provisions were flat at

0.19 percent of average assets, in line with historical

lows. Nonperforming assets continue to be a challenge

to industry recovery, with the nonperforming asset

ratio remaining elevated at 1.9 percent of loans and

foreclosed assets, an improvement from 2.5 percent at

year-end 2013. (Also see “

Bank Holding Companies”

later in this section.)

Performance of state member banks. The perfor-

mance at state member banks in 2014 improved from

2013. As a group, state member banks reported a

profit of $18.9 billion for 2014, up from $18.2 billion

for 2013 and near pre-crisis levels. However, profit-

ability from a return on average assets (ROA) and

return on equity (ROE) perspective still lags pre-crisis

levels by nearly a quarter and one-third, respectively.

Provisions (as a percent of revenue) have continued

to decrease and are now 2.2 percent, down from a

crisis high of 32.4 percent at year-end 2009. Further,

3.6 percent of all state member banks continued to

report losses, down from 4.1 percent for year-end

2013. The nonperforming assets ratio remained

elevated at 1.0 percent of loans and foreclosed assets,

reflecting ongoing weaknesses in asset quality since

the crisis. Problem loans continued to decline during

2014; however, nonaccruals in Commercial & Indus-

trial and Credit Cards increased from the prior year.

The risk-based capital ratios for state member banks

were basically unchanged compared to the prior year

in the aggregate, and the percent of state member

banks deemed well capitalized under prompt correc-

tive action standards remained high at 99 percent. In

2014, one state member bank, with $155 million in

assets, failed. (Also see “

State Member Banks” later

in this section.)

For a detailed discussion of macroprudential supervision and

regulation, refer to

section 3, “Financial Stability.”

Enhanced prudential standards. The Dodd-Frank

Wall Street Reform and Consumer Protection Act of

2010 (Dodd-Frank Act) directs the Board, in part, to

establish prudential standards in order to prevent or

mitigate risks to U.S. financial stability that could

arise from the material financial distress or failure, or

ongoing activities of, large, interconnected financial

institutions. In 2014, the Board established or pro-

posed to establish a variety of enhanced prudential

standards. (See “

Enhanced Prudential Standards”

later in this section for details.)

Recovery and resolution planning. The Federal

Reserve, in collaboration with other U.S. agencies,

has continued to work with large financial institu-

tions to develop a range of recovery and resolution

strategies in the event of their distress or failure. (See

box 1 for details.)

Community bank focus. In 2014, the Board renewed

its focus on supervision and regulation of community

banks (defined as a state member bank and/or hold-

ing company with $10 billion or less in total consoli-

Box 1. Recovery and Resolution Planning

The Federal Reserve, in collaboration with other U.S.

agencies, has continued to work with large financial

institutions to develop a range of recovery and reso-

lution strategies in the event of their distress or

failure.

Recovery Planning

The Federal Reserve has required that the largest

and most globally active U.S. financial institutions

develop recovery plans that describe a number of

options and actions that may be taken by manage-

ment to maintain the financial institution as a going

concern during instances of extreme stress. On Sep-

tember 25, 2014, the Federal Reserve issued SR let-

ter 14-8 (“Consolidated Recovery Planning for Cer-

tain Large Domestic Bank Holding Companies”) that

applies to eight domestic bank holding companies

that may pose elevated risk to U.S. financial stability

(

www.federalreserve.gov/bankinforeg/srletters/

sr1408.pdf

). A key objective of SR letter 14-8 is to

enhance the resiliency of a firm to adverse develop-

ments which, in turn, will lower the probability of its

failure or inability to serve as a financial intermediary.

Resolution Planning

In 2011, the Federal Reserve and the FDIC jointly

issued rules implementing the resolution plan require-

ment for financial institutions that are subject to

heightened prudential standards. The Federal

Reserve’s final resolution plan rule, Regulation QQ, is

available at

www.gpo.gov/fdsys/pkg/FR-2011-11-01/

html/2011-27377.htm

In a phased approach based on nonbank asset size,

initial resolution plans were submitted by the first

group of 11 financial institutions in July 2012, the

second group of four institutions in July 2013, and all

other covered companies in December 2013. Since

the passage of the rule, seven financial institutions,

three of which are nonbank financial institutions,

have qualified as new covered companies and filed

their initial resolution plans in 2014. The initial plan

submissions identified and described the firms’ criti-

cal operations, core business lines, material legal

entities, interconnections and interdependencies,

corporate governance structure and processes

related to resolution, impediments to resolution, and

the actions the financial institution will take to facili-

tate its orderly resolution.

Under the resolution plan rule, resolution plans are

required to be submitted on an annual basis after the

initial filing.

Where appropriate, the second iteration plans sub-

mitted by firms addressed supplemental guidance

from the Federal Reserve and the FDIC (

www

.federalreserve.gov/newsevents/press/bcreg/

bcreg20130415c2.pdf

•

Feedback on second round resolution plans. In

2014, the Federal Reserve and the FDIC provided

feedback on the second iteration of submissions

from 12 large firms that are important to U.S.

financial stability (

www.federalreserve.gov/

newsevents/press/bcreg/20140805a.htm

and

www.federalreserve.gov/newsevents/press/bcreg/

20141125a.htm

). The agencies require that the

next round of submissions on July 1, 2015, dem-

onstrate that the firms are making significant prog-

ress to address the shortcomings identified in the

agency letters and are taking significant actions to

improve their resolvability under the U.S. Bank-

ruptcy Code.

Resolution plan submissions must include both a

confidential and public portion. The public portion of

each resolution plan is available on the Federal

Reserve’s website (

www.federalreserve.gov/

bankinforeg/resolution-plans.htm

). The Federal

Reserve and the FDIC may determine that a resolu-

tion plan is not credible or would not facilitate an

orderly resolution of the institution under the U.S.

Bankruptcy Code.

In accordance with principles promulgated by the

Financial Stability Board, the Federal Reserve partici-

pates with other U.S. and international supervisors in

crisis-management group meetings to enhance pre-

paredness for the cross-border management and

resolution of a failed global systemically important

financial institution.

48 101st Annual Report | 2014

dated assets), with an emphasis on weighing the costs

of regulatory proposals, supervisory guidance, and

examination practices on these institutions against

safety-and-soundness benefits. (See

box 2 for details.)

Supervision

The Federal Reserve is the federal supervisor and

regulator of all U.S. BHCs, including financial hold-

ing companies, and state-chartered commercial banks

that are members of the Federal Reserve System. The

Federal Reserve also has responsibility for supervis-

ing the operations of all Edge Act and agreement

corporations, the international operations of state

member banks and U.S. BHCs, and the U.S. opera-

tions of foreign banking organizations. Furthermore,

through the Dodd-Frank Act, the Federal Reserve

has been assigned responsibilities for nonbank finan-

cial firms and financial market utilities (FMUs) des-

ignated by the Financial Stability Oversight Council

(FSOC) as systemically important. In addition, the

Dodd-Frank Act transferred authority for consoli-

dated supervision of more than 400 savings and loan

holding companies (SLHCs) and their non-

depository subsidiaries from the former Office of

Thrift Supervision (OTS) to the Federal Reserve.

In overseeing the institutions under its authority, the

Federal Reserve seeks primarily to promote safety

and soundness, including compliance with laws and

regulations.

Safety and Soundness

The Federal Reserve uses a range of supervisory

activities to promote the safety and soundness of

financial institutions and maintain a comprehensive

understanding and assessment of each firm. These

activities include horizontal reviews, firm-specific

examinations and inspections, continuous monitor-

ing and surveillance activities, and implementation of

enforcement or other supervisory actions as neces-

sary. The Federal Reserve also provides training and

technical assistance to foreign supervisors and

minority-owned and de novo depository institutions.

Examinations and Inspections

The Federal Reserve conducts examinations of state

member banks, FMUs, the U.S. branches and agen-

cies of foreign banks, and Edge Act and agreement

corporations. In a process distinct from examina-

tions, it conducts inspections of holding companies

and their nonbank subsidiaries. Whether an exami-

nation or an inspection is being conducted, the

review of operations entails

•

an evaluation of the adequacy of governance pro-

vided by the board and senior management,

including an assessment of internal policies, proce-

dures, controls, and operations;

•

an assessment of the quality of the risk-management

and internal control processes in place to identify,

measure, monitor, and control risks;

•

an assessment of the key financial factors of capi-

tal, asset quality, earnings, and liquidity; and

•

a review for compliance with applicable laws and

regulations.

Table 1 provides information on examinations and

inspections conducted by the Federal Reserve during

the past five years.

Consolidated Supervision

Consolidated supervision, a method of supervision

that encompasses the parent company and its subsid-

iaries, allows the Federal Reserve to understand the

organization’s structure, activities, resources, risks,

and financial and operational resilience. Working

with other relevant supervisors and regulators, the

Federal Reserve seeks to ensure that financial, opera-

tional, or other deficiencies are addressed before they

pose a danger to the consolidated organization, its

banking off ices, or the broader economy.

Large financial institutions increasingly operate and

manage their integrated businesses across corporate

boundaries. Financial trouble in one part of a finan-

cial institution can spread rapidly to other parts of

the institution. Risks that cross legal entities or that

are managed on a consolidated basis cannot be

monitored properly through supervision that is

directed at any one of the legal entity subsidiaries

within the overall organization.

To strengthen its supervision of the largest, most

complex financial institutions, the Federal Reserve

created a centralized multidisciplinary body called

the Large Institution Supervision Coordinating

Committee (LISCC) to oversee the supervision and

evaluate conditions of supervised firms. The commit-

tee also develops cross-firm perspectives and moni-

tors interconnectedness and common practices that

could lead to systemic risk.

“Banking offices” are defined as U.S. depository institution sub-

sidiaries, as well as the U.S. branches and agencies of foreign

banking organizations.

Supervision and Regulation 49

Box 2. Efforts to Tailor Supervision for Community Banking Organizations

In 2011, the Board established a community and

regional bank subcommittee in order to better under-

stand and respond to concerns raised by these insti-

tutions. The Board is committed to ensuring that

regulatory requirements both suit community bank

characteristics and foster healthy lending conditions.

During 2014, the subcommittee sought additional

perspectives on community bank concerns and

explored additional opportunities to tailor community

bank supervision. Key aspects of these efforts

include the following:

1. Considering the impact of new and existing

regulations on community banking organiza-

tions and streamlining regulatory rules. A sub-

committee of the Board convened regularly to

evaluate the effects of regulatory proposals,

supervisory guidance, and examination practices

on community banks. These reviews help ensure

that regulatory directives are commensurate with

the size and complexity of community banking

organizations. In addition, throughout 2014,

through an internal review of all Federal Reserve

guidance and through participation in inter-

agency efforts to comply with the Economic

Growth and Regulatory Paperwork Reduction

Act of 1996, the Federal Reserve began a review

of outstanding supervisory guidance to identify

and address any outdated, unduly burdensome,

or unnecessary requirements.

2. Risk-focusing examination activities. The Fed-

eral Reserve enhanced its offsite financial

screening process, which allows deployment of

resources based on the risk profile of individual

institutions. Accordingly, examinations of banks

engaged in higher-risk activities will be more

involved than examinations of banks engaged in

less-risky activities.

3. Enhancing communication with the commu-

nity bank industry. The Federal Reserve remains

committed to fostering enhanced communica-

tion between banking supervisors and commu-

nity bankers. Primary efforts to support this

objective include the following:

•

Meeting with the Community Depository

Institutions Advisory Council. Established in

2010, a council composed of community bank,

thrift, and credit union representatives from

each of the 12 Federal Reserve Districts pro-

vided the Board of Governors with industry

input on the economy, lending conditions, and

other topics of interest to community banking

organizations. During 2014, this council par-

ticipated in biannual meetings with Board offi-

cials to communicate their views on both the

banking industry and on pertinent regulatory

matters.

•

Communicating expectations related to the

supervision of community banking organiza-

tions. In support of this objective, applicability

statements were added to new supervisory

proposals to help community bankers more

readily identify aspects of supervisory direc-

tives pertinent to their organizations. In addi-

tion, staff from the Board of Governors had

regular discussions with community bank

examiners to clarify expectations related to the

applicability of supervisory rules to community

banks. With a similar objective, the Federal

Reserve began to enhance the community

bank examiner-training curriculum to ensure

that supervisory expectations for larger banks

do not make their way into the curriculum or

the examination process.

•

Disseminating supervisory publications with

a focus on community banking organiza-

tions. The Federal Reserve uses the following

System publications to communicate with

community banking organizations on emerging

risks and important supervisory matters:

—Community Banking Connections®—

Throughout 2014, the publication offered a

number of articles focused on timely regulatory

topics, including loan policy development,

cybersecurity, and third-party relationship

management (

www

.communitybankingconnections.org/

—FedLinks®—Articles published throughout

2014 covered topics outlining supervisory

expectations for a number of banking func-

tions, including implementation of the new

capital rules, development of contingency

funding plans, and introduction of new prod-

ucts and services (

www

.communitybankingconnections.org/fedlinks

4. Focusing on community bank research. In

2014, for the second consecutive year, the sub-

committee worked with an informal working

group of economists from the research and

supervision functions in the Federal Reserve

System to consider and support supervisory deci-

sions relative to community banking organiza-

tions. Findings of research conducted by this

group helped guide community bank policy

development and implementation. Further, in

2014, for the second consecutive year, the Fed-

eral Reserve Bank of St. Louis, in collaboration

with the Conference of State Bank Supervisors,

hosted a Community Banking Research and

Policy Conference focused on the role of commu-

nity banks in the financial system. As with the first

conference, this conference helped to highlight

the issues most important to community bank

vitality.

50 101st Annual Report | 2014

The framework for the consolidated supervision of

LISCC firms and other large financial institutions

was issued in December 2012.

This framework

strengthens traditional microprudential supervision

and regulation to enhance the safety and soundness

of individual firms and incorporates macroprudential

considerations to reduce potential threats to the sta-

bility of the financial system. The framework has two

primary objectives:

1. Enhancing resiliency of a firm to lower the prob-

ability of its failure or inability to serve as a finan-

cial intermediary. Each firm is expected to ensure

that the consolidated organization (or the com-

bined U.S. operations in the case of foreign bank-

ing organizations) and its core business lines can

survive under a broad range of internal or exter-

nal stresses. This requires financial resilience by

maintaining sufficient capital and liquidity, and

operational resilience by maintaining effective

corporate governance, risk management, and

recovery planning.

Reducing the impact on the financial system and

the broader economy in the event of a firm’s failure

or material weakness. Each firm is expected to

ensure the sustainability of its critical operations

and banking offices under a broad range of inter-

nal or external stresses. This requires, among

other things, effective resolution planning that

addresses the complexity and the interconnectiv-

ity of the firm’s operations.

The framework is designed to support a tailored

supervisory approach that accounts for the unique

risk characteristics of each firm, including the nature

and degree of potential systemic risk inherent in a

firm’s activities and operations, and is being imple-

mented in a multi-stage approach.

The Federal Reserve uses a range of supervisory

activities to maintain a comprehensive understanding

and assessment of each large financial institution:

For more information about the supervisory framework, see the

Board’s press release and SR letter 12-17/CA 12-14 at

www

.federalreserve.gov/newsevents/press/bcreg/20121217a.htm

Table 1. State member banks and bank holding companies, 2010–14

Entity/item 2014 2013 2012 2011 2010

State member banks

Total number 858 850 843 828 829

Total assets (billions of dollars) 2,233 2,060 2,005 1,891 1,697

Number of examinations 723 745 769 809 912

By Federal Reserve System 438 459 487 507 722

By state banking agency 285 286 282 302 190

Top-tier bank holding companies

Large (assets of more than $1 billion)

Total number 522 505 508 491 482

Total assets (billions of dollars) 16,642 16,269 16,112 16,443 15,986

Number of inspections 738 716 712 672 677

By Federal Reserve System

706 695 691 642 654

On site 501 509 514 461 491

Off site 205 186 177 181 163

By state banking agency 32 21 21 30 23

Small (assets of $1 billion or less)

Total number 3,902 4,036 4,124 4,251 4,362

Total assets (billions of dollars) 953 953 983 982 991

Number of inspections 2,824 3,131 3,329 3,306 3,340

By Federal Reserve System 2,737 2,962 3,150 3,160 3,199

On site 142 148 200 163 167

Off site 2,595 2,814 2,950 2,997 3,032

By state banking agency 87 169 179 146 141

Financial holding companies

Domestic 426 420 408 417 430

Foreign 40 39 38 40 43

For large bank holding companies subject to continuous, risk-focused supervision, includes multiple targeted reviews.

Supervision and Regulation 51

•

Coordinated horizontal reviews. These reviews involve

examining several institutions simultaneously and

encompass firm-specific supervision and the devel-

opment of cross-firm perspectives. In addition, the

Federal Reserve uses a multidisciplinary approach to

draw on a wide range of perspectives, including

those from supervisors, examiners, economists,

financial experts, payments systems analysts, and

other specialists. Examples include analysis of capital

adequacy and planning through the Comprehensive

Capital Analysis and Review (CCAR), as well as

horizontal evaluations of resolution plans and incen-

tive compensation practices.

•

Firm-specific examinations and/or inspections and

continuous monitoring activities. These activities are

designed to maintain an understanding and assess-

ment across the core areas of supervisory focus.

These activities include review and assessment of

changes in strategy, inherent risks, control pro-

cesses, and key personnel, and follow-up on previ-

ously identified concerns (for example, areas sub-

ject to enforcement actions), or emerging

vulnerabilities.

•

Interagency information sharing and coordination.

In developing and executing a detailed supervisory

plan for each firm, the Federal Reserve generally

relies to the fullest extent possible on the informa-

tion and assessments provided by other relevant

supervisors and functional regulators. The Federal

Reserve actively participates in interagency infor-

mation sharing and coordination, consistent with

applicable laws, to promote comprehensive and

effective supervision and limit unnecessary duplica-

tion of information requests. Supervisory agencies

continue to enhance formal and informal discus-

sions to jointly identify and address key vulner-

abilities and to coordinate supervisory strategies

for large financial institutions.

•

Internal audit and control functions. In certain

instances, supervisors may be able to rely on a firm’s

internal audit or internal control functions in devel-

oping a comprehensive understanding and

assessment.

The Federal Reserve uses a risk-focused approach to

supervision, with activities directed toward identify-

ing the areas of greatest risk to f inancial institutions

and assessing the ability of institutions’ management

processes to identify, measure, monitor, and control

those risks. For medium- and small-sized financial

institutions, the risk-focused consolidated supervi-

sion program provides that examination and inspec-

tion procedures are tailored to each organization’s

size, complexity, risk profile, and condition. The

supervisory program for an institution, regardless of

its asset size, entails both off-site and on-site work,

including development of supervisory plans, pre-

examination visits, detailed documentation, and

preparation of examination reports tailored to the

scope and findings of the examination.

Capital Planning and Stress Tests

Since the financial crisis, the Board has led a series of

initiatives to strengthen the capital positions of the

largest banking organizations. Two related initiatives

are the CCAR and the Dodd-Frank Act stress tests

(DFAST).

CCAR is a horizontal exercise to evaluate capital

adequacy, internal capital adequacy assessment pro-

cesses, and planned capital distributions at large

BHCs. In CCAR, the Federal Reserve assesses

whether these BHCs have sufficient capital to with-

stand highly stressful operating environments and be

able to continue operations, maintain ready access to

funding, meet obligations to creditors and counter-

parties, and serve as credit intermediaries. Capital is

central to a BHC’s ability to absorb losses and con-

tinue to lend to creditworthy businesses and consum-

ers. Through CCAR, a BHC’s capital adequacy is

evaluated on a forward-looking, post-stress basis as

the BHCs are required to demonstrate in their capital

plans how they will maintain, throughout a very

stressful period, capital above a tier 1 common ratio

of 5 percent and above minimum regulatory capital

requirements. From a microprudential perspective,

the CCAR provides a structured means for supervi-

sors to assess not only whether these BHCs hold

enough capital, but also whether they are able to rap-

idly and accurately determine their risk exposures, an

essential element of effective risk management. From

a macroprudential perspective, the use of a common

scenario allows us to learn how a particular risk or

combination of risks might affect the banking system

as a whole—not just individual institutions.

In 2014, CCAR incorporated the transition arrange-

ments and minimum capital requirements from the

revised regulatory capital framework implementing

the Basel III regulatory capital reforms the Board

finalized in July 2013. The 2014 CCAR results are

available at

www.federalreserve.gov/newsevents/press/

bcreg/ccar_20140326.pdf

DFAST is a supervisory stress test conducted by the

Federal Reserve to evaluate whether large BHCs and

52 101st Annual Report | 2014

all nonbank financial companies designated by the

FSOC have sufficient capital to absorb losses result-

ing from stressful economic and financial market

conditions. The Dodd-Frank Act also requires BHCs

and other financial companies supervised by the Fed-

eral Reserve to conduct their own stress tests.

Together, the Dodd-Frank Act supervisory stress

tests and the company-run stress tests are intended to

provide company management and boards of direc-

tors, the public, and supervisors with forward-

looking information to help gauge the potential effect

of stressful conditions on the capital adequacy of

these large banking organizations. The 2014 DFAST

results are available at

www.federalreserve.gov/

newsevents/press/bcreg/bcreg20140320a1.pdf

State Member Banks

At the end of 2014, 1,923 banks (excluding nonde-

pository trust companies and private banks) were

members of the Federal Reserve System, of which

858 were state chartered. Federal Reserve System

member banks operated 57,265 branches, and

accounted for 34 percent of all commercial banks in

the United States and for 71 percent of all commer-

cial banking offices. State-chartered commercial

banks that are members of the Federal Reserve, com-

monly referred to as state member banks, represented

approximately 15 percent of all insured U.S. commer-

cial banks and held approximately 15 percent of all

insured commercial bank assets in the United States.

Under section 10 of the Federal Deposit Insurance

Act, as amended by section 111 of the Federal

Deposit Insurance Corporation Improvement Act of

1991 and by the Riegle Community Development

and Regulatory Improvement Act of 1994, the Fed-

eral Reserve must conduct a full-scope, on-site exami-

nation of state member banks at least once a year,

although certain well-capitalized, well-managed orga-

nizations with total assets of less than $500 million

may be examined once every 18 months.

The Fed-

eral Reserve conducted 438 exams of state member

banks in 2014.

Bank Holding Companies

At year-end 2014, a total of 4,922 U.S. BHCs were in

operation, of which 4,424 were top-tier BHCs. These

organizations controlled 4,755 insured commercial

banks and held approximately 99 percent of all

insured commercial bank assets in the United States.

Federal Reserve guidelines call for annual inspections

of large BHCs and complex smaller companies. In

judging the financial condition of the subsidiary

banks owned by holding companies, Federal Reserve

examiners consult examination reports prepared by

the federal and state banking authorities that have

primary responsibility for the supervision of those

banks, thereby minimizing duplication of effort and

reducing the supervisory burden on banking

organizations.

Inspections of BHCs, including financial holding

companies, are built around a rating system intro-

duced in early January of 2005. The system reflects

the shift in supervisory practices away from a histori-

cal analysis of financial condition toward a more

dynamic, forward-looking assessment of risk-

management practices and financial factors. Under

the system, known as RFI but more fully termed

RFI/C(D), holding companies are assigned a com-

posite rating (C) that is based on assessments of

three components: Risk Management (R), Financial

Condition (F), and the potential Impact (I) of the

parent company and its nondepository subsidiaries

on the subsidiary depository institution. The fourth

component, Depository Institution (D), is intended

to mirror the primary supervisor’s rating of the sub-

sidiary depository institution.

Noncomplex BHCs

with consolidated assets of $1 billion or less are sub-

ject to a special supervisory program that permits a

more flexible approach.

In 2014, the Federal Reserve

conducted 695 inspections of large BHCs and 2,737

inspections of small, noncomplex BHCs.

Financial Holding Companies

Under the Gramm-Leach-Bliley Act, BHCs that meet

certain capital, managerial, and other requirements

The Office of the Comptroller of the Currency examines nation-

ally chartered banks, and the Federal Deposit Insurance Corpo-

ration examines state-chartered banks that are not members of

the Federal Reserve.

The Financial Services Regulatory Relief Act of 2006, which

became effective in October 2006, authorized the federal bank-

ing agencies to raise the threshold from $250 million to

$500 million, and final rules incorporating the change into exist-

ing regulations were issued on September 21, 2007.

Each of the first two components has four subcomponents:

Risk Management—(1) Board and Senior Management Over-

sight; (2) Policies, Procedures, and Limits; (3) Risk Monitoring

and Management Information Systems; and (4) Internal Con-

trols. Financial Condition—(1) Capital, (2) Asset Quality,

(3) Earnings, and (4) Liquidity.

The special supervisory program was implemented in 1997, most

recently modified in 2013. See SR letter 13-21 for a discussion of

the factors considered in determining whether a BHC is com-

plex or noncomplex (

www.federalreserve.gov/bankinforeg/

srletters/sr1321.htm

Supervision and Regulation 53

may elect to become financial holding companies and

thereby engage in a wider range of financial activities,

including full-scope securities underwriting, merchant

banking, and insurance underwriting and sales. As of

year-end 2014, 426 domestic BHCs and 40 foreign

banking organizations had financial holding company

status. Of the domestic financial holding companies,

23 had consolidated assets of $50 billion or more; 32,

between $10 billion and $50 billion; 122, between

$1 billion and $10 billion; and 249, less than $1 billion.

Savings and Loan Holding Companies

The Dodd-Frank Act transferred responsibility for

supervision and regulation of SLHCs from the OTS

to the Federal Reserve in July 2011. At year-end

2014, a total of 542 SLHCs were in operation, of

which 297 were top tier SLHCs. These SLHCs con-

trol 305 thrift institutions and include 27 companies

engaged primarily in nonbanking activities, such as

insurance underwriting (15 SLHCs), securities bro-

kerage (6 SLHCs), and commercial activities (6

SLHCs). Excluding nonbank SIFI SLHCs, the 25

largest SLHCs accounted for more than $1.3 trillion

of total combined assets. Approximately 90 percent

of SLHCs engage primarily in depository activities.

These firms hold approximately 20.8 percent

($321 billion) of the total combined assets of all

SLHCs. The Office of the Comptroller of the Cur-

rency (OCC) is the primary regulator for most of the

subsidiary savings associations of the firms engaged

primarily in depository activities.

Table 2 provides

information on examinations of SLHCs for the past

three years.

Board staff continues to work on operational, policy,

and supervisory issues while engaging the industry,

Reserve Banks, and other regulatory agencies. Nearly

all of the SLHCs are now filing all required Federal

Reserve regulatory reports. Significant milestones

achieved include the formal incorporation of Federal

Reserve policies into the SLHC supervision program.

Several complex policy issues continue to be

addressed by the Board, including those related to

consolidated capital requirements for insurance

SLHCs, intermediate holding companies, and the

adoption of formal rating systems.

Financial Market Utilities

FMUs manage or operate multilateral systems for

the purpose of transferring, clearing, or settling pay-

ments, securities, or other financial transactions

among financial institutions or between financial

institutions and the FMU. Under the Federal

Reserve Act, the Federal Reserve supervises FMUs

that are chartered as member banks or Edge Act cor-

porations and cooperates with other federal banking

supervisors to supervise FMUs considered bank ser-

vice providers under the Bank Service Company Act.

In July 2012, the FSOC voted to designate eight

FMUs as systemically important under title VIII of

the Dodd-Frank Act. As a result of these designa-

Table 2. Savings and loan holding companies, 2011–14

Entity/item 2014 2013 2012 2011

Top-tier savings and loan holding companies

Large

Total number 76 81 94 n/a

Total assets $1,492,964,310 $1,500,412,835 $1,715,259,113 n/a

Number of examinations

By Federal Reserve System

On site 45 58 53 n/a

Off site 37 13 27 n/a

By states’ Department of Insurance 1 1 2 n/a

Small

Total number 221 251 272 n/a

Total assets (billions of dollars) $ 64,813,982 $ 75,952,384 $ 81,558,809 n/a

Number of examinations

By Federal Reserve System

On site 10 21 46 n/a

Off site 202 237 183 n/a

Responsibility for SLHCs was transferred to the Board in 2011. Asset data are not available for year-end 2011 due to transition.

Excludes SIFI SLHCs (AIG and GE).

54 101st Annual Report | 2014

tions, the Federal Reserve assumed an expanded set

of responsibilities related to these designated FMUs

that include promoting uniform risk-management

standards, playing an enhanced role in the supervi-

sion of designated FMUs, reducing systemic risk,

and supporting the stability of the broader financial

system. For designated FMUs subject to the Federal

Reserve’s supervision, the Board established risk-

management standards and expectations that are

articulated in Board Regulation HH (effective Sep-

tember 2012). The Board subsequently revised these

standards to take into account new international

standards (effective December 2014). In addition to

setting minimum risk-management standards, Regu-

lation HH also establishes requirements for the

advance notice of proposed material changes to the

rules, procedures, or operations of a designated

FMU for which the Federal Reserve is the supervi-

sory agency under title VIII of the Dodd-Frank Act.

Section 234.6 of Regulation HH (effective Febru-

ary 2014) establishes terms and conditions under

which the Board may authorize a designated FMU

access to Reserve Bank accounts and services.

The Federal Reserve’s risk-based supervision program

for FMUs is administered by the FMU Supervision

Committee (FMU-SC). The FMU-SC is a multidisci-

plinary committee of senior supervision, payment

policy, and legal staff at the Board of Governors and

Reserve Banks who are responsible for, and knowl-

edgeable about, supervisory issues for FMUs. The

FMU-SC’s primary objective is to provide senior level

oversight, consistency, and direction to the Federal

Reserve’s supervisory process for FMUs. The

FMU-SC coordinates with the LISCC on issues

related to large financial institutions’ roles in FMUs;

the payment, clearing, and settlement activities of

large financial institutions; and the FMU activities and

implications for large financial institutions.

In an effort to promote greater financial market sta-

bility and mitigate systemic risk, the Board works

closely with the Securities and Exchange Commission

(SEC) and the Commodity Futures Trading Com-

mission, both of which also have supervisory author-

ity for certain FMUs. The Federal Reserve’s work

with these agencies under title VIII, including the

sharing of appropriate information and participation

in designated FMU examinations, aims to improve

consistency in FMU supervision, promote robust

FMU risk management, and improve the regulators’

ability to monitor and mitigate systemic risk.

Designated Nonfinancial Companies

In 2013, the FSOC designated three nonbank finan-

cial companies for supervision by the Board: Ameri-

can International Group, Inc.; General Electric Capi-

tal Corporation, Inc. (GECC); and Prudential Finan-

cial, Inc. In late 2014, the FSOC designated a fourth

nonbank financial company, Metlife, Inc. The Fed-

eral Reserve’s supervisory approach for these firms as

designated companies is consistent with the approach

used for the largest financial holding companies, tai-

lored to account for different material characteristics

of each firm. The Dodd-Frank Act requires the

Board to apply enhanced prudential standards and

early remediation requirements to BHCs with at least

$50 billion in consolidated assets and to the nonbank

financial companies designated by the FSOC for

supervision by the Board. The act authorizes the

Board to tailor the application of these standards

and requirements to different companies on an indi-

vidual basis or by category. As discussed in

“

Enhanced Prudential Standards” later in this sec-

tion, in November the Board invited public comment

on enhanced prudential standards for the regulation

and supervision of GECC.

International Activities

The Federal Reserve supervises the foreign branches

and overseas investments of member banks, Edge

Act and agreement corporations, and BHCs (includ-

ing the investments by BHCs in export trading com-

panies). In addition, it supervises the activities that

foreign banking organizations conduct through enti-

ties in the United States, including branches, agen-

cies, representative offices, and subsidiaries.

Foreign operations of U.S. banking organizations. In

supervising the international operations of state

member banks, Edge Act and agreement corpora-

tions, and BHCs, the Federal Reserve generally con-

ducts its examinations or inspections at the U.S. head

offices of these organizations, where the ultimate

responsibility for the foreign offices resides. Examin-

ers also visit the overseas offices of U.S. banking

organizations to obtain financial and operating infor-

mation and, in some instances, to test their adherence

to safe and sound banking practices and compliance

with rules and regulations. Examinations abroad are

conducted with the cooperation of the supervisory

authorities of the countries in which they take place;

Supervision and Regulation 55

for national banks, the examinations are coordinated

with the OCC.

At the end of 2014, 39 member banks were operating

444 branches in foreign countries and overseas areas

of the United States; 22 national banks were operat-

ing 391 of these branches, and 17 state member

banks were operating the remaining 53. In addition,

11 nonmember banks were operating 18 branches in

foreign countries and overseas areas of the United

States.

Edge Act and agreement corporations. Edge Act cor-

porations are international banking organizations

chartered by the Board to provide all segments of the

U.S. economy with a means of financing interna-

tional business, especially exports. Agreement corpo-

rations are similar organizations, state or federally

chartered, that enter into agreements with the Board

to refrain from exercising any power that is not per-

missible for an Edge Act corporation. Sections 25

and 25A of the Federal Reserve Act grant Edge Act

and agreement corporations permission to engage in

international banking and foreign financial transac-

tions. These corporations, most of which are subsid-

iaries of member banks, may (1) conduct a deposit

and loan business in states other than that of the par-

ent, provided that the business is strictly related to

international transactions and (2) make foreign

investments that are broader than those permissible

for member banks.

At year-end 2014, out of 44 banking organizations

chartered as Edge Act or agreement corporations, 3

operated 7 Edge Act and agreement branches. These

corporations are examined annually.

U.S. activities of foreign banks. Foreign banks con-

tinue to be significant participants in the U.S. bank-

ing system. As of year-end 2014, 163 foreign banks

from 49 countries operated 187 state-licensed

branches and agencies, of which 6 were insured by

the Federal Deposit Insurance Corporation (FDIC),

and 48 OCC-licensed branches and agencies, of

which 4 were insured by the FDIC. These foreign

banks also owned 10 Edge Act and agreement corpo-

rations and 1 commercial lending company. In addi-

tion, they held a controlling interest in 47 U.S. com-

mercial banks. Altogether, the U.S. offices of these

foreign banks controlled approximately 21 percent of

U.S. commercial banking assets. These 163 foreign

banks also operated 89 representative offices; an

additional 34 foreign banks operated in the United

States through a representative office. The Federal

Reserve—in coordination with appropriate state

regulatory authorities—examines state-licensed, non-

FDIC-insured branches and agencies of foreign

banks on-site at least once every 18 months.

In most

cases, on-site examinations are conducted at least

once every 12 months, but the period may be

extended to 18 months if the branch or agency meets

certain criteria. As part of the supervisory process, a

review of the financial and operational profile of

each organization is conducted to assess the organi-

zation’s ability to support its U.S. operations and to

determine what risks, if any, the organization poses

to the banking system through its U.S. operations.

The Federal Reserve conducted or participated with

state and federal regulatory authorities in 512 exami-

nations in 2014.

Compliance with Regulatory Requirements

The Federal Reserve examines institutions for com-

pliance with a broad range of legal requirements,

including anti-money-laundering (AML) and con-

sumer protection laws and regulations, and other

laws pertaining to certain banking and financial

activities. Most compliance supervision is conducted

under the oversight of the Board’s Division of Bank-

ing Supervision and Regulation, but consumer com-

pliance supervision is conducted under the oversight

of the Division of Consumer and Community

Affairs. The two divisions coordinate their efforts

with each other and also with the Board’s Legal Divi-

sion to ensure consistent and comprehensive Federal

Reserve supervision for compliance with legal

requirements.

Anti-Money-Laundering Examinations

The Treasury regulations implementing the Bank

Secrecy Act (BSA) generally require banks and other

types of financial institutions to file certain reports

and maintain certain records that are useful in crimi-

nal, tax, or regulatory proceedings. The BSA and

separate Board regulations require banking organiza-

tions supervised by the Board to file reports on suspi-

cious activity related to possible violations of federal

law, including money laundering, terrorism financ-

ing, and other financial crimes. In addition, BSA and

Board regulations require that banks develop written

BSA compliance programs and that the programs be

for mally approved by bank boards of directors. The

Federal Reserve is responsible for examining institu-

tions for compliance with applicable AML laws and

The OCC examines federally licensed branches and agencies,

and the FDIC examines state-licensed FDIC-insured branches

in coordination with the appropriate state regulatory authority.

56 101st Annual Report | 2014

regulations and conducts such examinations in accor-

dance with the Federal Financial Institutions Exami-

nation Council’s (FFIEC) Bank Secrecy Act/Anti-

Money Laundering Examination Manual.

Specialized Examinations

The Federal Reserve conducts specialized examina-

tions of supervised financial institutions in the areas

of information technology, fiduciary activities, trans-

fer agent activities, and government and municipal

securities dealing and brokering. The Federal Reserve

also conducts specialized examinations of certain

nonbank entities that extend credit subject to the

Board’s margin regulations.

Information Technology Activities

In recognition of the importance of information

technology to safe and sound operations in the finan-

cial industry, the Federal Reserve reviews the infor-

mation technology activities of supervised financial

institutions, as well as certain independent data cen-

ters that provide information technology services to

these organizations. All safety-and-soundness exami-

nations include a risk-focused review of information

technology risk-management activities. During 2014,

the Federal Reserve continued as the lead supervisory

agency for 8 of the 16 large, multiregional data pro-

cessing servicers recognized on an interagency basis.

Fiduciary Activities

The Federal Reserve has supervisory responsibility

for state member banks and state member nonde-

pository trust companies, which hold assets in vari-

ous fiduciary and custodial capacities. On-site exami-

nations of fiduciary and custodial activities are risk-

focused and entail the review of an organization’s

compliance with laws, regulations, and general fidu-

ciary principles, including effective management of

conflicts of interest; management of legal, opera-

tional, and reputational risk exposures; and audit

and control procedures. In 2014, Federal Reserve

examiners conducted 97 fiduciary examinations,

excluding transfer agent examinations, of state mem-

ber banks.

Transfer Agents

As directed by the Securities Exchange Act of 1934,

the Federal Reserve conducts specialized examina-

tions of those state member banks and BHCs that

are registered with the Board as transfer agents.

Among other things, transfer agents countersign and

monitor the issuance of securities, register the trans-

fer of securities, and exchange or convert securities.

On-site examinations focus on the effectiveness of an

organization’s operations and its compliance with

relevant securities regulations. During 2014, the Fed-

eral Reserve conducted transfer agent examinations

at 7 of the 36 state member banks and BHCs that

were registered as transfer agents.

Government and Municipal Securities

Dealers and Brokers

The Federal Reserve is responsible for examining

state member banks and foreign banks for compli-

ance with the Government Securities Act of 1986

and with the Treasury regulations governing dealing

and brokering in government securities. Fourteen

state member banks and six state branches of foreign

banks have notified the Board that they are govern-

ment securities dealers or brokers not exempt from

the Treasury’s regulations. During 2014, the Federal

Reserve conducted seven examinations of broker–

dealer activities in government securities at these

organizations. These examinations are generally con-

ducted concurrently with the Federal Reserve’s

examination of the state member bank or branch.

The Federal Reserve is also responsible for ensuring

that state member banks and BHCs that act as

municipal securities dealers comply with the Securi-

ties Act Amendments of 1975. Municipal securities

dealers are examined, pursuant to the Municipal

Securities Rulemaking Board’s rule G-16, at least

once every two calendar years. Eight of the 10 enti-

ties supervised by the Federal Reserve that dealt in

municipal securities were examined during 2014.

Securities Credit Lenders

Under the Securities Exchange Act of 1934, the

Board is responsible for regulating credit in certain

transactions involving the purchasing or carrying of

securities. As part of its general examination pro-

gram, the Federal Reserve examines the banks under

its jurisdiction for compliance with Board Regula-

tion U (Credit by Banks and Persons other than Bro-

kers or Dealers for the Purpose of Purchasing or

Carrying Margin Stock). The Federal Reserve may

conduct specialized examinations of these lenders if

they are not already subject to supervision by the

The FFIEC is an interagency body of financial regulatory agen-

cies established to prescribe uniform principles, standards, and

report forms and to promote uniformity in the supervision of

financial institutions. The Council has six voting members: the

Board of Governors of the Federal Reserve System, the FDIC,

the National Credit Union Administration, the OCC, the Con-

sumer Financial Protection Bureau, and the chair of the State

Liaison Committee.

Supervision and Regulation 57

Farm Credit Administration or the National Credit

Union Administration (NCUA).

Cybersecurity and Critical Infrastructure

The Federal Reserve is actively engaged with inter-

agency groups such as the Financial and Banking

Information Infrastructure Committee (FBIIC) and

the FFIEC’s Cybersecurity and Critical Infrastruc-

ture Working Group (CCIWG) to share information

and collaborate on cyber- and critical infrastructure-

related issues impacting the financial services sector.

In 2014, the Federal Reserve conducted a targeted

cybersecurity assessment on a select group of large

financial institutions and FMUs. The Federal Reserve

and other CCIWG members also conducted cyberse-

curity assessments at over 500 community financial

institutions to evaluate their cybersecurity risk expo-

sure and preparedness. The cybersecurity assessment

reviewed financial institutions’ current practices and

overall preparedness relative to risk management and

oversight, threat intelligence and collaboration, cyber-

security controls, external dependency management,

and cyber incident management and resilience.

The Federal Reserve is also actively engaged in rais-

ing financial institution awareness of supervisory

expectations relative to cybersecurity risk assessment

and risk mitigation. In 2014, the Federal Reserve

contributed to the launch of the new FFIEC cyberse-

curity awareness web page, which is a central reposi-

tory for current and future FFIEC-related materials

on cybersecurity (

www.ffiec.gov/cybersecurity.htm).

Enforcement Actions

The Federal Reserve has enforcement authority over

the financial institutions it supervises and their affili-

ated parties. Enforcement actions may be taken to

address unsafe and unsound practices or violations

of any law or regulation. Formal enforcement actions

include cease and desist orders, written agreements,

prompt corrective action directives, removal and pro-

hibition orders, and civil money penalties. In 2014,

the Federal Reserve completed 37 formal enforce-

ment actions. Civil money penalties totaling

$817,653,925 were assessed. As directed by statute, all

civil money penalties are remitted to either the Treas-

ury or the Federal Emergency Management Agency.

Enforcement orders and prompt corrective action

directives, which are issued by the Board, and written

agreements, which are executed by the Reserve

Banks, are made public and are posted on the

Board’s website (

www.federalreserve.gov/apps/

enforcementactions/).

In 2014, the Reserve Banks completed 117 informal

enforcement actions. Informal enforcement actions

include memoranda of understanding (MOU), com-

mitment letters, and board of directors’ resolutions.

Surveillance and Off-Site Monitoring

The Federal Reserve uses automated screening sys-

tems to monitor the financial condition and perfor-

mance of state member banks and BHCs in the

period between on-site examinations. Such monitor-

ing and analysis helps direct examination resources to

institutions that have higher risk profiles. Screening

systems also assist in the planning of examinations

by identifying companies that are engaging in new or

complex activities.

The primary off-site monitoring tool used by the

Federal Reserve is the Supervision and Regula-

tion Statistical Assessment of Bank Risk model (SR-

SABR). Drawing mainly on the financial data that

banks report on their Reports of Condition and

Income (Call Reports), SR-SABR uses econometric

techniques to identify banks that report financial

characteristics weaker than those of other banks

assigned similar supervisory ratings. To supplement

the SR-SABR screening, the Federal Reserve also

monitors various market data, including equity

prices, debt spreads, agency ratings, and measures of

expected default frequency, to gauge market percep-

tions of the risk in banking organizations. In addi-

tion, the Federal Reserve prepares quarterly Bank

Holding Company Performance Reports (BHCPRs)

for use in monitoring and inspecting supervised

banking organizations. The BHCPRs, which are

compiled from data provided by large BHCs in quar-

terly regulatory reports (FR Y-9C and FR Y-9LP),

contain, for individual companies, financial statistics

and comparisons with peer companies. BHCPRs are

made available to the public on the National Infor-

mation Center (NIC) website, which can be accessed

www.ffiec.gov.

Federal Reserve analysts use Performance Report

Information and Surveillance Monitoring (PRISM),

a querying tool, to access and display financial, sur-

veillance, and examination data. In the analytical

module, users can customize the presentation of

institutional financial information drawn from Call

Reports, Uniform Bank Performance Reports, FR

Y-9 statements, BHCPRs, and other regulatory

reports. In the surveillance module, users can gener-

ate reports summarizing the results of surveillance

screening for banks and BHCs. During 2014, two

major and two minor upgrades to the web-based

58 101st Annual Report | 2014

PRISM application were completed to enhance the

user’s experience and provide the latest technology.

The Federal Reserve works through the FFIEC Task

Force on Surveillance Systems to coordinate surveil-

lance activities with the other federal banking agencies.

Training and Technical Assistance

The Federal Reserve provides training and technical

assistance to foreign supervisors and minority-owned

depository institutions.

International Training and Technical Assistance

In 2014, the Federal Reserve continued to provide

technical assistance on bank supervisory matters to

foreign central banks and supervisory authorities.

Technical assistance involves visits by Federal

Reserve staff members to foreign authorities as well

as consultations with foreign supervisors who visit

the Board or the Reserve Banks. In addition, the

Middle East and North Africa (MENA) Financial

Regulator’s Training Initiative (FRTI) successfully

concluded. This 10-year initiative was established to

provide technical assistance and bank supervision

training to central banks and supervisory authorities

in the region. MENA FRTI’s many accomplishments

over the past decade include the sponsorship of over

50 programs and conferences as well as many short-

term, on-the-job training opportunities provided for

MENA regulators with U.S. banking agencies. Now

that the MENA FRTI has concluded, the Federal

Reserve will forge training partnerships with the cen-

tral banks of Bahrain, United Arab Emirates, and

Qatar to continue technical capacity building

throughout the region.

In 2014, the Federal Reserve offered a number of

training courses exclusively for foreign supervisory

authorities, both in the United States and in a num-

ber of foreign jurisdictions. Federal Reserve staff also

took part in technical assistance and training mis-

sions led by the International Monetary Fund, the

World Bank, the Asian Development Bank, the Basel

Committee on Banking Supervision, and the Finan-

cial Stability Institute.

The Federal Reserve is an associate member of the

Association of Supervisors of Banks of the Americas

(ASBA), an umbrella group of bank supervisors

from countries in the Western Hemisphere. The

group, headquartered in Mexico,

•

promotes communication and cooperation among

bank supervisors in the region;

•

coordinates training programs throughout the

region with the help of national banking supervi-

sors and international agencies; and,

•

aims to help members develop banking laws, regu-

lations, and supervisory practices that conform to

international best practices.

The Federal Reserve contributes significantly to

ASBA’s organizational management and to its train-

ing and technical assistance activities. Moreover, the

Federal Reserve also contributes to the regional train-

ing provision under the Asia Pacific Economic Coop-

eration FRTI.

Efforts to Support Minority-Owned

Depository Institutions

The Federal Reserve System implements its responsi-

bilities under section 367 of the Dodd-Frank Act pri-

marily through its Partnership for Progress (PFP)

program. Established in 2008, this program promotes

the viability of minority-owned institutions (MOIs)

by facilitating activities designed to strengthen their

business strategies, maximize their resources, and

increase their awareness and understanding of regu-

latory topics. In addition, the Federal Reserve contin-

ues to maintain the PFP website, which supports

MOIs by providing them with technical information

and links to useful resources (

www.fedpartnership

.gov

). Representatives from each of the 12 Reserve

Bank districts, along with staff from the Board of

Governors, continue to offer technical assistance tai-

lored to MOIs by providing targeted supervisory

guidance, identifying additional resources, and foster-

ing mutually beneficial partnerships between MOIs

and community organizations. As of year-end 2014,

the Federal Reserve’s MOI portfolio included 18

state member banks.

Throughout 2014, the Federal Reserve System con-

tinued to support MOIs through the following

activities:

•

facilitating a meeting between the National Bank-

ers Association (NBA), Chair Yellen, Vice Chair-

man Fischer, and Governor Powell during which

the NBA shared with the governors their perspec-

tive on community banking issues of importance

to MOIs;

•

publishing an article in the Federal Reserve’s Com-

munity Banking Connections

publication to high-

light MOIs and their contribution to the economy

(

www.communitybankingconnections.org/articles/

Supervision and Regulation 59

2014/q3-q4/promoting-an-inclusive-financial-

system

);

•

participating in the 87th annual NBA convention;

•

hosting an internal Rapid Response

session on the

topic of MOIs to educate the Federal Reserve’s

community bank examination staff on the unique

characteristics of these organizations;

•

providing technical assistance to MOIs on a wide

variety of topics, including topics focused on

improving regulatory ratings, navigating the regula-

tory applications process, and refining capital-

planning practices;

•

creating for mal procedures related to monitoring

MOI-related proposals and continuing to offer pre-

review of MOI applications to support early identi-

fication and resolution of issues that could create

delays in the review process;

•

partnering with the NBA, the National Urban

League, and the Minority Council of the Indepen-

dent Community Bankers Association in outreach

events;

•

in conjunction with the Division of Consumer and

Community Affairs, conducting several joint out-

reach efforts to educate MOIs on supervisory top-

ics; and

•

participating in an interagency task force to con-

sider and address supervisory challenges facing

MOIs.

Throughout 2014, PFP representatives hosted and

participated in numerous banking workshops and

seminars aimed at promoting and preserving MOIs,

including the NBA’s Legislative and Regulatory Con-

ference and the National Urban League Convention.

Further, program representatives continued to col-

laborate with community leaders, trade groups, the

Small Business Administration, and other organiza-

tions to seek support for MOIs.

Supervisory Policy

The Federal Reserve’s supervisory policy function,

carried out by the Board, is responsible for develop-

ing regulations and guidance for financial institutions

under the Federal Reserve’s supervision, as well as

guidance for examiners. The Board, often in concert

with the OCC and the FDIC (together, the federal

banking agencies), issues rulemakings, public SR let-

ters, and other policy statements and guidance in

order to carry out its supervisory policies. Federal

Reserve staff also take part in supervisory and regu-

latory forums, provide support for the work of the

FFIEC, and participate in international policymak-

ing forums, including the Basel Committee on Bank-

ing Supervision (BCBS), the Financial Stability

Board, and the Joint Forum.

Enhanced Prudential Standards

The Board is responsible for issuing a number of

rules and guidance statements under the Dodd-

Frank Act, sometimes in conjunction with other

agencies. Listed below are the initiatives undertaken

by the Board in 2014.

•

In January, the Board issued a supervisory guid-

ance statement, SR 14-1, to clarify the heightened

supervisory expectations for recovery and resolu-

tion preparedness for the eight largest domestic

BHCs that pose elevated risk to U.S. financial sta-

bility. The Board issued this SR letter as a supple-

ment to SR letter 12-17/CA letter 12-14, “Consoli-

dated Supervision Framework for Large Financial

Institutions.” The Board plans to incorporate

reviews of key capabilities for recovery and resolu-

tion preparedness in its ongoing supervisory work

for each BHC subject to this guidance, which is

available at

www.federalreserve.gov/bankinforeg/

srletters/SR1401.htm

•

In March, the Board published a final rule to

implement certain enhanced prudential standards

required under section 165 of the Dodd-Frank Act

for BHCs, including foreign banking organizations,

with total global consolidated assets of $50 billion

or more. These standards include risk-based and

leverage capital requirements, liquidity standards,

and requirements for overall risk management. In

addition, the final rule requires a foreign banking

organization with $50 billion or more in U.S. non-

branch assets to form an intermediate holding

company over its U.S. subsidiaries. The intermedi-

ate holding company of the foreign banking orga-

nization will be required to meet substantially the

same capital, liquidity, and risk-management stan-

dards as a similar U.S. BHC. The final rule also

establishes risk committee requirements and capital

stress-testing requirements for certain BHCs and

foreign banking organizations with total consoli-

dated assets of $10 billion or more. The final rule is

available at

www.gpo.gov/fdsys/pkg/FR-2014-03-

27/pdf/2014-05699.pdf

•

In March, the federal banking agencies issued

supervisory guidance that discusses supervisory

expectations for implementing the Dodd-Frank

Act company-run stress tests for banking organiza-

60 101st Annual Report | 2014

tions with total consolidated assets of more than

$10 billion but less than $50 billion. This guidance

builds upon the interagency stress testing guidance

issued in May 2012 for companies with more than

$10 billion in total consolidated assets. It is impor-

tant to note that the guidance states that such

banking organizations are not subject to other

requirements and expectations applicable to BHCs

with assets of at least $50 billion, including the

Federal Reserve’s capital plan rule, annual Compre-

hensive Capital Analysis and Review, supervisory

stress tests for capital adequacy, or the related data

collections supporting the supervisory stress test.

The guidance is available at

www.gpo.gov/fdsys/

pkg/FR-2014-03-13/pdf/2014-05518.pdf

•

In May, the federal banking agencies issued a final

rule to strengthen the leverage ratio standards for

the eight largest, most systemically significant U.S.

banking organizations. Under the final rule, U.S.

top-tier BHCs with more than $700 billion in con-

solidated total assets or $10 trillion in assets under

custody are required to maintain a leverage buffer

greater than 2 percentage points above the 3 per-

cent minimum supplementary leverage ratio, for a

total of more than 5 percent, to avoid restrictions

on capital distributions and certain discretionary

bonus payments. The insured depository institution

(IDI) subsidiaries of these BHCs must maintain at

least a 6 percent supplementary leverage ratio to be

considered “well capitalized” under the agencies’

prompt corrective action framework. The final rule,

which has an effective date of January 1, 2018, is

available at

www.gpo.gov/fdsys/pkg/FR-2014-05-

01/pdf/2014-09367.pdf

•

In October, the federal banking agencies finalized a

rule implementing a liquidity coverage ratio (LCR)

requirement based on the BCBS’s LCR standard.

The LCR will be the first broadly applicable quan-

titative liquidity requirement for U.S. banking

firms. Under the LCR, large banking organizations

are required to hold an amount of high-quality liq-

uid assets sufficient to meet expected net cash out-

flows over a 30-day time horizon in a standardized

supervisory stress scenario. The final rule, effective

January 1, 2015, applies the most stringent LCR

requirements to banking organizations with con-

solidated total assets of $250 billion or more or

consolidated total on-balance sheet foreign expo-

sure of $10 billion or more, and their subsidiary

insured depository institutions with $10 billion or

more of consolidated total assets. The final rule

applies a simpler, less stringent LCR requirement

to depository holding companies with $50 billion

or more that are not otherwise covered by the rule,

effective January 1, 2016. The final rule is available

www.gpo.gov/fdsys/pkg/FR-2014-10-10/pdf/

2014-22520.pdf

•

In December, the Board invited public comment on

enhanced prudential standards for the regulation

and supervision of General Electric Capital Corpo-

ration (GECC), a nonbank financial company that

the FSOC designated for supervision by the Board.

In light of the substantial similarity of GECC’s

activities and risk profile to that of a similarly sized

BHC, the proposal would apply enhanced pruden-

tial standards to GECC that are generally similar

to those that apply to large BHCs, including stan-

dards for risk-based and leverage capital, capital

planning, stress testing, liquidity, and risk manage-

ment. The proposal is available at

www.gpo.gov/

fdsys/pkg/FR-2014-12-03/pdf/2014-28414.pdf

•

In December, the Board issued a proposed rule that

would establish a methodology to identify whether

a U.S. BHC is a global systemically important

banking organization (GSIB). As such, a GSIB

would be subject to a risk-based capital surcharge

that is calibrated based on its systemic risk profile.

The proposal builds on a GSIB capital surcharge

framework agreed to by the BCBS and is aug-

mented to address the risk arising from the over-

reliance on short-term wholesale funding. The

GSIB surcharge under the proposal would gener-

ally be higher than under the BCBS approach. Fail-

ure to maintain the capital surcharge would subject

the GSIB to restrictions on capital distributions

and certain discretionary bonus payments. The

proposal would be phased in beginning on Janu-

ary 1, 2016, becoming fully effective on January 1,

2019. The proposed rule is available at

www.gpo

.gov/fdsys/pkg/FR-2014-12-18/pdf/2014-29330.pdf

Other Capital Adequacy Standards

In 2014, the Board issued several rulemakings and

guidance documents related to capital adequacy,

including joint rulemakings with the other federal

banking agencies that would implement certain revi-

sions to the Basel capital framework.

•

In March, the Board and the OCC permitted cer-

tain banking organizations to exit from the parallel

run stage of the agencies’ advanced approaches

risk-based capital framework, and henceforth, to

use the advanced approaches rule to deter mine

their risk-based capital requirements. Concurrently,

the Board issued a final rule clarifying that BHCs

Supervision and Regulation 61

using the advanced approaches framework incor-

porate such framework into their capital planning

and stress testing cycles that begin October 1, 2015.

The final rule is available at

www.gpo.gov/fdsys/

pkg/FR-2014-03-11/pdf/2014-05053.pdf

•

In April, the federal banking agencies proposed a

rule to correct the definition of eligible guarantee in

the risk-based capital rules by clarifying the types of

guarantees that can be recognized for purposes of

calculating a banking organization’s regulatory capi-

tal under the advanced approaches framework. The

federal banking agencies finalized the rule in July.

The final rule is available at

www.gpo.gov/fdsys/pkg/

FR-2014-07-30/pdf/2014-17858.pdf

•

In September, the federal banking agencies adopted

a final rule modifying the definition of the denomi-

nator of the supplementary leverage ratio, which

applies to advanced approaches banking organiza-

tions, in a manner consistent with changes agreed

to by the BCBS. The final rule strengthens the

supplementary leverage ratio by modifying the

methodology for including off-balance sheet items,

including credit derivatives, repo-style transactions,

and lines of credit, in the denominator of the

supplementary leverage ratio. The final rule is

available at

www.gpo.gov/fdsys/pkg/FR-2014-09-

26/pdf/2014-22083.pdf

•

In October, the Board issued a final rule that modi-

fies the regulations for capital planning and stress

testing and adjusts the due date for BHCs with total

consolidated assets of $50 billion or more to submit

their capital plans and stress test results. Beginning

in 2016, the due date will shift from January to April.

The final rule is available at

www.gpo.gov/fdsys/pkg/

FR-2014-10-27/pdf/2014-25170.pdf

•

In December, the federal banking agencies issued a

proposed rule clarifying the regulatory capital rules

adopted by the agencies in July 2013. The proposal

applies only to large internationally active banking

organizations that are subject to the advanced

approaches rule. The proposed rule would make

technical corrections and clarify certain aspects of

the advanced approaches rule, including the quali-

fication criteria for application of the advanced

approaches and calculation requirements for risk-

weighted assets. The proposed rule is available at

www.gpo.gov/fdsys/pkg/FR-2014-12-18/pdf/2014-

28690.pdf

•

In December, the Board issued a proposed rule to

provide additional information regarding the appli-

cation of the Board’s regulatory capital framework

to depository institution holding companies that

have non-traditional capital structures. The pro-

posal describes examples of capital instruments

potentially issued by non-stock entities that may

not qualify as common equity tier 1 capital, and

provides suggestions on changes that would allow

qualification. The proposal also notes that the

Board expects to propose regulatory capital rules in

the future for SLHCs that are personal or family

trusts and are not business trusts, and would pro-

vide a temporary exemption for those entities from

the regulatory capital rules. Similarly, the proposal

states that the Board expects to clarify the applica-

tion of the regulatory capital rules to depository

institution holding companies that are employee

stock ownership plans. The proposed rule is avail-

able at

www.gpo.gov/fdsys/pkg/FR-2014-12-19/pdf/

2014-29561.pdf

•

In December, the Board and the OCC issued an

interim final rule to ensure that the treatment of

over-the-counter derivatives, eligible margin loans,

and repo-style transactions under the two agencies’

regulatory capital and liquidity coverage ratio rules

would be unaffected by the implementation of cer-

tain foreign special resolution regimes for financial

companies or by a banking organization’s adher-

ence to the International Swaps and Derivatives

Association’s Resolution Stay Protocol. The

interim final rule is effective as of January 1, 2015,

and is available at

www.federalreserve.gov/

newsevents/press/bcreg/20141216a.htm

International Coordination on

Supervisory Policies

As a member of the BCBS, the Federal Reserve

actively participates in efforts to advance sound

supervisory policies for internationally active bank-

ing organizations and to enhance the strength and

stability of the international banking system.

Basel Committee on Banking Supervision

During 2014, the Federal Reserve participated in

ongoing international initiatives to track the progress

of implementation of the BCBS framework in mem-

ber countries.

The Federal Reserve contributed to supervisory

policy recommendations, reports, and papers issued

for consultative purposes or finalized by the BCBS

that are designed to improve the supervision of

banking organizations’ practices and to address spe-

62 101st Annual Report | 2014

cific issues that emerged during the financial crisis.

The list below includes key final and consultative

papers issued in 2014.

Final papers:

•

Basel III leverage ratio framework and disclosure

requirements (issued in January and available at

www.bis.org/publ/bcbs270.htm).

•

Liquidity coverage ratio disclosure standards – final

document (issued in January and available at

www.bis.org/publ/bcbs272.htm).

•

The Liquidity Coverage Ratio and restricted-use

committed liquidity facilities (issued in January and

available at

www.bis.org/publ/bcbs274.htm).

•

The standardised approach for measuring counter-

party credit risk exposures (issued in March and

available at

www.bis.org/publ/bcbs279.htm).

•

Capital requirements for bank exposures to central

counterparties – final standard (issued in April and

available at

www.bis.org/publ/bcbs282.htm).

•

Supervisory framework for measuring and control-

ling large exposures – final standard (issued in April

and available at

www.bis.org/publ/bcbs283.htm).

•

Basel III: the net stable funding ratio (issued in

October and available at

www.bis.org/bcbs/publ/

d295.htm

•

Revisions to the securitisation framework (issued in

December and available at

www.bis.org/bcbs/publ/

d303.htm

Consultative papers:

•

Basel III: the Net Stable Funding Ratio – consulta-

tive document (issued in January and available at

www.bis.org/publ/bcbs271.htm).

•

Review of Pillar 3 disclosure requirements (issued

in June and available at

www.bis.org/publ/

bcbs286.htm

•

Operational risk – Revisions to the simpler

approaches – consultative document (issued in

October and available at

www.bis.org/publ/

bcbs291.htm

•

Net Stable Funding Ratio disclosure standards –

consultative document (issued in December and

available at

www.bis.org/bcbs/publ/d302.htm).

•

Fundamental review of the trading book: outstand-

ing issues – consultative document (issued in Decem-

ber and available at

www.bis.org/bcbs/publ/

d305.htm

•

Capital floors: the design of a framework based on

standardised approaches – consultative document

(issued in December and available at

www.bis.org/

bcbs/publ/d306.htm

•

Revisions to the standardised approach for credit risk

– consultative document (issued in December and

available at

www.bis.org/bcbs/publ/d307.htm).

Financial Stability Board

In 2014, the Federal Reserve continued its active par-

ticipation in the activities of the Financial Stability

Board, an international group that helps coordinate

the work of national financial authorities and inter-

national standard setting bodies, and develops and

promotes the implementation of financial sector poli-

cies in the interest of financial stability.

For more information on the work of the Financial

Stability Board, refer to

section 3, “Financial

Stability.”

Joint Forum

In 2014, the Federal Reserve continued its participa-

tion in the Joint Forum—an international group of

supervisors of the banking, securities, and insurance

industries established to address various cross-sector

issues, including the regulation of financial conglom-

erates. The Joint Forum operates under the aegis of

the BCBS, the International Organization of Securi-

ties Commissions, and the International Association

of Insurance Supervisors. Final papers issued by the

Joint Forum in 2014 include:

•

Point of Sale disclosure in the insurance, banking

and securities sectors – final report (issued in April

and available at

www.bis.org/publ/joint35.pdf).

•

Report on supervisory colleges for financial conglom-

erates (issued in September and available at

www.bis.org/publ/joint36.pdf).

Accounting Policy

The Federal Reserve strongly endorses sound corpo-

rate governance and effective accounting and audit-

ing practices for all regulated financial institutions.

Accordingly, the Federal Reserve’s accounting policy

function is responsible for providing expertise in

policy development and implementation efforts, both

within and outside the Federal Reserve System, on

issues affecting the banking and insurance industries

in the areas of accounting, auditing, internal controls

Supervision and Regulation 63

over financial reporting, financial disclosure, and

supervisory financial reporting.

Federal Reserve staff regularly consult with key con-

stituents in the accounting and auditing professions,

including domestic and international standard-

setters, accounting firms, accounting and financial

sector trade groups, and other financial sector regula-

tors to facilitate the Board’s understanding of

domestic and international practices; proposed

accounting, auditing, and regulatory standards; and

the interactions between accounting standards and

regulatory reform efforts. The Federal Reserve also

participates in various accounting, auditing, and

regulatory forums in order to both formulate and

communicate its views.

During 2014, Federal Reserve staff addressed numer-

ous issues including loan accounting, troubled debt

restructurings, accounting alternatives for private

companies, financial instrument accounting and

reporting, consolidation of structured entities, securi-

tizations, securities financing transactions, and exter-

nal and internal audit processes.

The Federal Reserve shared its views with accounting

and auditing standard-setters through informal dis-

cussions and public comment letters. Comment let-

ters on the Financial Accounting Standards Board’s

proposal related to business combinations and on the

Public Company Accounting Oversight Board’s pro-

posal related to the changes in the auditor’s reporting

model were issued during the past year.

The Federal Reserve staff also participated in meet-

ings of the Basel Committee’s Accounting Experts

Group and the International Association of Insur-

ance Supervisors’ (IAIS) Accounting and Auditing

Working Group. These groups represent their respec-

tive organizations at international meetings on

accounting, auditing, and disclosure issues affecting

global banking organizations. Working with interna-

tional bank supervisors, Federal Reserve staff con-

tributed to the development of numerous comment

letters and publications that were issued by the Basel

Committee and the IAIS. The publications issued

during 2014 included guidance on the external audits

of banks and the consultative document on the

review of pillar 3 disclosure requirements.

In 2014, the Federal Reserve issued supervisory guid-

ance to financial institutions and supervisory staff on

accounting matters, as appropriate, and participated

in a number of supervisory-related activities. For

example, Federal Reserve staff

•

issued guidance on income tax allocation in a hold-

ing company structure;

•

developed and participated in a number of domes-

tic and international supervisory training programs

and education sessions to educate supervisors and

bankers about new and emerging accounting and

reporting topics affecting financial institutions; and

•

supported the efforts of the Reserve Banks in

financial institution supervisory activities through

participation in examinations and provision of

expert guidance on specific queries related to finan-

cial accounting, auditing, reporting, and

disclosures.

The Federal Reserve System staff also provided their

accounting and business expertise through participa-

tion in other supervisory activities during the past

year. These activities included supporting Dodd-

Frank Act initiatives related to stress testing of banks

and credit risk retention requirements for securitiza-

tion, as well as various Basel III issues.

Credit-Risk Management

The Federal Reserve works with the other federal

banking agencies to develop guidance on the man-

agement of credit risk; to coordinate the assessment

of regulated institutions’ credit-risk management

practices; and to ensure that institutions properly

identify, measure, and manage credit risk.

Shared National Credit Program

In November, the Federal Reserve and the other bank-

ing agencies released summary results of the 2014

annual review of the Shared National Credit (SNC)

Program, a long-standing program to promote an effi-

cient and consistent review and classification of shared

national credits. A SNC is any loan or formal loan

commitment—and any asset, such as other real estate,

stocks, notes, bonds, and debentures taken as debts

previously contracted—extended to borrowers by a

supervised institution, its subsidiaries, and affiliates. A

SNC must have an original loan amount that aggre-

gates to $20 million or more and either (1) is shared by

three or more unaffiliated supervised institutions

under a formal lending agreement, or (2) a portion of

which is sold to two or more unaffiliated supervised

institutions with the purchasing institutions assuming

their pro rata share of the credit risk.

64 101st Annual Report | 2014

The 2014 SNC review was prepared in the second

quarter of 2014 using data as of December 31, 2013,

and March 31, 2014. The 2014 SNC portfolio totaled

$3.39 trillion, with roughly 9,800 credit facilities to

approximately 6,200 borrowers. From the previous

period, the dollar volume of the portfolio commitment

amount rose by $379 billion or 12.6 percent, and the

number of credits increased by 502 or 5.4 percent.

The SNC examination found that the volume of

criticized assets increased 12.8 percent to $340.8 bil-

lion. As a percentage of total commitments, the over-

all criticized asset rate remained elevated at 10.1 per-

cent, up from 10.0 percent in 2013. The elevated criti-

cized rate is historically high when compared to SNC

portfolios at this stage of the economic cycle.

For the 2014 SNC review, supervisors placed signifi-

cant emphasis on reviewing leveraged loans to evalu-

ate safety and soundness of bank underwriting and

risk-management practices relative to expectations

articulated in the 2013 Interagency Guidance on Lev-

eraged Lending. The review found that risk in the

overall SNC portfolio was centered in the leveraged

portfolio, noting a criticized rate of 33.2 percent for

leveraged loans compared with 3.3 percent for the

non-leveraged portfolio. The 2014 SNC review also

identified several areas where institutions need to

strengthen risk-management practices, including

inadequate support for enterprise valuations and/or

reliance on dated valuations, weaknesses in credit

analysis, and overreliance on sponsor’s projections.

Underwriting standards were also noted as weak in

31 percent of the SNC loan transactions sampled.

Leveraged lending transactions were the primary

driver of this underwriting deterioration.

Refinancing risk increased moderately in the SNC

portfolio as 25.0 percent of SNC commitments will

mature in 2015 and 2016, compared with 15.0 per-

cent for the same period in the 2013 SNC Review.

During 2013 and into 2014, syndicated lenders con-

tinued to refinance and modify loan agreements to

extend maturities. These transactions had the effect

of relieving near-term refinancing risk, but, in many

instances, did not improve borrowers’ ability to repay

their debts in the longer term as obligors frequently

added to their existing debt burden. For more infor-

mation on the 2014 SNC review, visit the Board’s

website at

www.federalreserve.gov/newsevents/press/

bcreg/20141107a.htm

Compliance Risk Management

The Federal Reserve works with international and

domestic supervisors to develop guidance that pro-

motes compliance with Bank Secrecy Act and anti-

money-laundering compliance (BSA/AML) and

counter terrorism laws.

Bank Secrecy Act and

Anti-Money-Laundering Compliance

In 2014, the Federal Reserve continued to actively

promote the development and maintenance of effec-

tive BSA/AML compliance risk-management pro-

grams, including developing supervisory strategies

and providing guidance to the industry on trends in

BSA/AML compliance. For example, the Federal

Reserve supervisory staff participated in a number of

industry conferences to continue to communicate

regulatory expectations and policy interpretations for

financial institutions.

The Federal Reserve is a member of the Treasury-led

BSA Advisory Group, which includes representatives

of regulatory agencies, law enforcement, and the finan-

cial services industry and covers all aspects of the BSA.

The Federal Reserve also participated in several

Treasury-led private/public sector dialogues with Latin

American and Mexican financial institutions, regula-

tors, and supervisors. These dialogues are designed to

promote information sharing and understanding of

issues surrounding correspondent banking relations

between U.S. and country-specific financial sectors. In

addition, the Federal Reserve participated in meetings

during the year to discuss BSA/AML issues with del-

egations from Latvia, China, and Mexico regarding

managing and reporting on AML risk, customer due

diligence, and emerging payments. The Federal

Reserve also participates in the FFIEC BSA/AML

working group, a monthly forum for the discussion of

pending BSA policy and regulatory matters. In addi-

tion to the FFIEC agencies, the BSA/AML working

group includes the Financial Crimes Enforcement Net-

work (FinCEN) and, on a quarterly basis, the SEC,

the Commodity Futures Trading Commission, the

Internal Revenue Service, and the Office of Foreign

Assets Control (OFAC).

The FFIEC BSA/AML working group is responsible

for updating the FFIEC Bank Secrecy Act/Anti-Money

Laundering Examination Manual. The FFIEC devel-

oped this manual as part of its ongoing commitment

to provide current and consistent interagency guidance

Supervision and Regulation 65

on risk-based policies, procedures, and processes for

financial institutions to comply with the BSA and safe-

guard their operations from money laundering and ter-

rorist financing. In 2014, the FFIEC BSA/AML work-

ing group updated the manual to further clarify super-

visory expectations and incorporate regulatory

changes since its 2010 revision. The 2014 revisions also

incorporate feedback from the banking industry and

examination staff.

Throughout 2014, the Federal Reserve and other fed-

eral banking agencies continued to regularly share

examination findings and enforcement proceedings

with FinCEN as well as with OFAC under the inter-

agency MOUs finalized in 2004 and 2006.

In 2014, the Federal Reserve continued to participate

in the U.S. Treasury’s Interagency Task Force on

Strengthening and Clarifying the BSA/AML Frame-

work (task force), created in 2012, which includes

representatives from the Department of Justice,

OFAC, FinCEN, the federal banking agencies, the

SEC, and the Commodity Futures Trading Commis-

sion. The primary focus of the task force is to review

the BSA, its implementation, and its enforcement

with respect to U.S. financial institutions that are

subject to these requirements, and to develop recom-

mendations for ensuring the continued effectiveness

of the BSA and efficiency in agency efforts to moni-

tor compliance.

International Coordination on

Sanctions, Anti-Money-Laundering, and

Counter-Terrorism Financing

The Federal Reserve participates in a number of

international coordination initiatives related to sanc-

tions, money laundering, and terrorism financing.

For example, the Federal Reserve has a long-standing

role in the U.S. delegation to the intergovernmental

Financial Action Task Force (FATF) and its working

groups, contributing a banking supervisory perspec-

tive to formulation of international standards. The

Federal Reserve participated in developing the FATF

guidance for the banking sector on identifying,

assessing, and monitoring money laundering and the

financing of terrorism on a risk-assessed basis, which

was published in October 2014. The Federal Reserve

also participated in efforts by FATF to more fully

understand effective AML supervision and enforce-

ment. Finally, the Federal Reserve continues to par-

ticipate in a subcommittee of the Basel Committee

that focuses on AML/counter-terrorism financing

issues. With respect to that subcommittee, the Fed-

eral Reserve actively contributed to updating and

revising a consultative paper on the general guide to

account opening, originally issued in 2003.

Incentive Compensation

To foster improved incentive compensation practices

in the financial industry, the Federal Reserve along

with the other federal banking agencies adopted

interagency guidance oriented to the risk-taking

incentives created by incentive compensation

arrangements.

The guidance is principles-based,

recognizing that the methods used to achieve appro-

priately risk-sensitive compensation arrangements

likely will differ significantly across and within firms.

Three principles are at the core of the guidance:

•

Incentive compensation arrangements should bal-

ance risk and financial results in a manner that

does not encourage employees to expose their orga-

nizations to imprudent risks.

•

A banking organization’s risk-management pro-

cesses and internal controls should reinforce and

support the development and maintenance of bal-

anced incentive compensation arrangements, and

incentive compensation should not hinder risk

management and controls.

•

Banking organizations should have strong and

effective corporate governance of incentive

compensation.

Through two Board-led horizontal reviews and with

ongoing engagement with the largest firms and our

supervisory teams, we have improved practice and

design of incentive compensation arrangements at

firms with greater than $50 billion in U.S. assets. This

supervisory work has been focused on assessing the

potential for incentive compensation arrangements to

encourage imprudent risk-taking; reviewing actions

large banking organizations have taken to correct

deficiencies in incentive compensation design; and

evaluating the adequacy of firms’ compensation-

related risk management, controls, and corporate

governance.

The Dodd-Frank Act requires the reporting to regu-

lators of incentive compensation arrangements and

prohibits incentive compensation arrangements that

provide excessive compensation or that could expose

the firm to inappropriate risks. Banking organiza-

tions, broker–dealers, investment advisers, and cer-

tain other firms are covered under the act if they

have $1 billion or more in total consolidated assets.

See “Guidance on Sound Incentive Compensation Policies,” 75

Federal Register 36395–36414 (June 25, 2010).

66 101st Annual Report | 2014

In 2011, the seven designated financial regulatory

agencies (Federal Reserve, OCC, FDIC, OTS,

NCUA, SEC, and the Federal Housing Finance

Agency) issued a joint proposed incentive compensa-

tion rule. The agencies continue to work toward a

rule to implement the act.

Other Policymaking Initiatives

•

In March, the Board issued an advance notice of

proposed rulemaking seeking comment to inform

its consideration of physical commodity activities

conducted by financial holding companies, includ-

ing current authorizations of these activities and

the appropriateness of further restrictions. The

proposed rule is available at

www.gpo.gov/fdsys/

pkg/FR-2014-03-05/pdf/2014-04742.pdf

•

In July, the federal banking agencies with the Con-

ference of State Bank Supervisors, issued a super-

visory guidance statement, SR 14-5, to reiterate

principles of sound risk management for home

equity lines of credit (HELOCs) that have reached

or will be reaching their end-of-draw periods. The

guidance describes risk-management practices to

promote a clear understanding of potential expo-

sures and to help guide consistent, effective

responses to HELOC borrowers who may be

unable to meet contractual obligations at their end-

of-draw periods and highlights concepts related to

financial reporting for HELOCs. The guidance is

available at

www.federalreserve.gov/bankinforeg/

srletters/sr1405.htm

•

In September, the federal banking agencies, along

with the Farm Credit Administration and the Fed-

eral Housing Finance Agency, issued a proposed

rule that would establish margin requirements for

swap dealers, major swap participants, security-

based swap dealers, and major security-based swap

participants as required by the Dodd-Frank Act.

The proposed rule would establish minimum

requirements for the exchange of initial and varia-

tion margin between covered swap entities and

their counterparties to non-cleared swaps and non-

cleared security-based swaps. The proposed rule is

available at

www.gpo.gov/fdsys/pkg/FR-2014-09-

24/pdf/2014-22001.pdf

•

In December, the federal banking agencies, along

with the Department of Housing and Urban

Development, the Federal Housing Finance

Agency, and the SEC, issued a final rule requiring

sponsors of securitization transactions to retain

risk in those transactions, implementing the risk

retention requirements in the Dodd-Frank Act.

The final rule requires sponsors of securitizations,

such as asset-backed securities (ABS), to retain not

less than 5 percent of the credit risk of the assets

collateralizing the ABS issuance unless certain

underwriting criteria on the securitized assets are

met. The rule also sets forth prohibitions on trans-

ferring or hedging the credit risk that the sponsor is

required to retain. The final rule is available at

www.gpo.gov/fdsys/pkg/FR-2014-12-24/pdf/2014-

29256.pdf

•

In November, the Board announced that it would

apply to SLHCs certain Federal Reserve supervi-

sory guidance documents issued prior to July 21,

2011, the date of transfer of supervision and regu-

lation of SLHCs from the former OTS to the

Board. The Board’s determination to apply these

SR letters to SLHCs follows an extensive review

of its existing guidance documents. The list of

SR letters applicable to SLHCs is available at

www.federalreserve.gov/bankinforeg/srletters/

sr1409.pdf

•

In November, the Board issued a final rule to

implement section 622 of the Dodd-Frank Act,

which establishes a financial sector concentration

limit that prevents a financial company from merg-

ing and consolidating with another financial com-

pany if the resulting company’s consolidated

liabilities would exceed 10 percent of the aggregate

consolidated liabilities of all financial companies.

Financial companies subject to the limit include

insured depository institutions, BHCs, SLHCs, for-

eign banking organizations, companies that control

insured depository institutions, and nonbank

financial companies designated by the FSOC for

Board supervision. The final rule is available at

www.gpo.gov/fdsys/pkg/FR-2014-11-14/pdf/2014-

26747.pdf

Regulatory Reports

The Federal Reserve’s supervisory policy function is

also responsible for developing, coordinating, and

implementing regulatory reporting requirements for

various financial reporting forms filed by domestic

and foreign financial institutions subject to Federal

Reserve supervision. Federal Reserve staff members

interact with other federal agencies and relevant state

supervisors, including foreign bank supervisors as

needed, to recommend and implement appropriate

Supervision and Regulation 67

and timely revisions to the reporting forms and the

attendant instructions.

Holding Company Regulatory Reports

The Federal Reserve requires that U.S. holding com-

panies (HCs) periodically submit reports that provide

information about their financial condition and

structure.

This information is essential to formulat-

ing and conducting bank regulation and supervision.

It is also used in responding to requests by Congress

and the public for information about HCs and their

nonbank subsidiaries. Foreign banking organizations

(FBOs) also are required to periodically submit

reports to the Federal Reserve. For more information

on the various reporting forms, see

www

.federalreserve.gov/apps/reportforms/default.aspx

During 2014, the following reporting forms were

revised:

•

FR Y-9C, FR Y-9SP, and the FFIEC 101—to

reflect changes to the calculation of regulatory

capital consistent with the Federal Reserve’s revised

regulatory capital rules. The Federal Reserve modi-

fied the FR Y-9C to split Schedule HC-R, Regula-

tory Capital, into two parts: Part I, which collects

information on revised regulatory capital compo-

nents and ratios; and Part II, which collects infor-

mation on existing risk-weighted assets. The Fed-

eral Reserve (with the other FFIEC member bank-

ing agencies) modified the FFIEC 101 Schedule A,

Advanced Risk-Based Capital, and nine other

schedules to implement the revised advanced

approaches capital rules.

•

Part II of Schedule HC-R of the FR Y-9C, and

line items related to securities lent and borrowed on

the FR Y-9C—to ensure that all banking organiza-

tions are reporting risk-weighted assets consistent

with the standardized approach outlined in the

revised regulatory capital rules.

•

FR Y-7Q—to require all FBOs with total consoli-

dated assets of $50 billion or more to begin filing

quarterly regardless of financial holding company

status. In addition, a data item was added to Part 1

to collect the top-tier FBO’s total combined assets

of U.S. operations, net of intercompany balances

and transactions between U.S. domiciled affiliates,

branches, and agencies (effective March 2014). In

December 2014, the FR Y-7Q report was revised to

collect a new data item to implement the enhanced

prudential standards for FBOs adopted pursuant

to section 165 of the Dodd-Frank Act. The new

item, Total U.S. Non-Branch Assets, is used to

determine which FBOs would be required to form

an intermediate holding company.

•

FR 2052a and 2052b—finalized in 2014. Subse-

quently, in December 2014, the Federal Reserve

Board proposed changes to the FR 2052a report,

including increasing granularity of data items,

updating reporting platform structure, and expand-

ing the scope of those institutions reporting. These

changes allow the Federal Reserve to monitor com-

pliance with the liquidity coverage ratio, but more

generally improve supervisory staff’s ability to

monitor liquidity risk.

•

FR XX-1—created to implement a reporting

requirement established by Regulation XX (Con-

centration Limit) for financial companies that do

not otherwise report consolidated total liabilities to

the Federal Reserve or other appropriate federal

banking agency.

•

FR Y-14—to better align FR Y-14A Schedule A

(Summary) with the changes to Part II of Sched-

ule HC-R of the FR Y-9C mentioned above. Also,

numerous items were added to the counterparty

collection that provides netting set and asset type

information for securities financing transactions

and derivative exposures to support ongoing super-

vision and supervisory modelling. Finally, several

items were added to the collection of wholesale

loan information.

•

FR Y-16—to incorporate the new capital frame-

work requirements of collecting common equity

tier 1 capital and the common equity tier 1 risk-

based capital ratio, and to modify the reporting

instructions to clarify a number of items.

The majority of SLHCs became compliant with Fed-

eral Reserve regulatory reporting by the end of 2013.

At this time, approximately 20 commercial and insur-

ance SLHCs remain exempt from filing consolidated

regulatory reports.

Commercial Bank Regulatory Reports

As the federal supervisor of state member banks, the

Federal Reserve, along with the other banking agen-

cies (through the FFIEC), requires banks to submit

quarterly the Consolidated Reports of Condition

and Income (Call Reports). Call Reports are the pri-

mary source of data for the supervision and regula-

tion of banks and the ongoing assessment of the

overall soundness of the nation’s banking system.

Call Report data provide the most current statistical

HCs are defined as bank holding companies, savings and loan

holding companies, and securities holding companies.

68 101st Annual Report | 2014

data available for evaluating institutions’ corporate

applications, for identifying areas of focus for both

on-site and off-site examinations, and for considering

monetary and other public policy issues. Call Report

data, which also serve as benchmarks for the finan-

cial information required by many other Federal

Reserve regulatory financial reports, are widely used

by state and local governments, state banking super-

visors, the banking industry, securities analysts, and

the academic community.

During 2014, the FFIEC revised the Call Report to

reflect changes to the calculation of regulatory capi-

tal consistent with the banking agencies’ revised regu-

latory capital rules. The FFIEC modified the Call

Report to split Schedule RC-R, Regulatory Capital,

into two parts: Part I, which collects information on

revised regulatory capital components and ratios, and

Part II, which collects information on existing risk-

weighted assets. The FFIEC also revised the follow-

ing types of information on the Call Report: effective

March 2014 (1) information about international

remittance transfers; (2) information on trade names

(other than an institution’s legal title) used to identify

physical offices and the addresses of any public-

facing Internet websites (other than the institution’s

primary Internet website address) at which the insti-

tution accepts or solicits deposits from the public;

(3) responses to a yes-no question asking whether the

reporting institution offers any deposit account prod-

ucts (other than time deposits) primarily intended for

consumers; (4) for institutions with $1 billion or

more in total assets that offer one or more deposit

account products (other than time deposits) primar-

ily intended for consumers, information on the total

balances of these consumer deposit account prod-

ucts; and, effective March 2015, (5) for institutions

with $1 billion or more in total assets that offer one

or more deposit account products (other than time

deposits) primarily intended for consumers, informa-

tion on the amount of income earned from each of

three categories of service charges on their consumer

deposit account products.

Also during 2014, the FFIEC proposed revisions to

Part II of Schedule RC-R, and to line items related to

securities lent and borrowed on Schedule RC-L,

Derivatives and Off-Balance-Sheet Items, to ensure

that all banking organizations are reporting risk-

weighted assets consistent with the standardized

approach outlined in the revised regulatory capital

rules.

Supervisory Information Technology

The Federal Reserve’s supervisory information tech-

nology function, under the guidance of the Subcom-

mittee on Supervisory Administration and Technol-

ogy, works to identify and set priorities for informa-

tion technology initiatives within the supervision and

regulation business line. Initiatives include the devel-

opment and maintenance of applications and tools

to assist with the examination of banking institu-

tions, data collection and storage, development and

deployment of collaboration tools, and data security.

In 2014, the infor mation technology supervisory

function focused on

•

Large bank and foreign bank supervision. Contin-

ued improving the supervision of large financial

institutions and foreign banks by integrating docu-

ment repositories for continuous monitoring and

point-in-time examinations. One such application

used to improve monitoring and tracking capabili-

ties is C-SCAPE (Consolidated Supervision Com-

parative Analysis Planning and Execution).

•

Community and regional bank supervision. For

banking institutions with less than $50 billion in

assets, worked with community and regional bank

examiners, as well as the FDIC and state bank

supervisors, to enhance supervisory tools used

jointly by the federal and state banking agencies.

•

Supervisory support tools. Continued to develop

and implement administrative technical solutions

to help support examiners and other supervisory

staff become more efficient through the manage-

ment of documentation, travel, and time. One such

application implemented in 2014 is ROAM – S—a

new supervisory scheduling tool that supports all

supervisory programs.

•

Content, collaboration, and mobility. (1) Provided

technology development and support on a broader

scale, with applications and programs designed to

be used across the supervisory function to enhance

efficiency and increase collaboration, mobility, and

data collection and storage; (2) implemented a new

document management platform to replace retired

platforms used by the Reserve Banks; (3) unveiled

new and enhanced collaboration tools, including

business social sites for internal and external col-

laboration; and (4) leveraged an Interagency Steer-

ing Group to improve methods for sharing work

among state and federal regulators.

Supervision and Regulation 69

•

Streamlined data access and improved security. Con-

tinued to streamline data access for the supervisory

function, while enhancing overall data security.

National Information Center

The National Information Center (NIC) is the Fed-

eral Reserve’s comprehensive repository for supervi-

sory, financial, banking structure data, as well as

supervisory documents. The NIC includes (1) data

on banking structure throughout the United States as

well as foreign banking concerns; (2) the National

Examination Data, an application that enables super-

visory personnel and federal and state banking

authorities to access NIC data; (3) the Banking Orga-

nization National Desktop, an application that facili-

tates secure, real-time electronic information sharing

and collaboration among federal and state banking

regulators for the supervision of banking organiza-

tions; and (4) the Central Document and Text

Repository, an application that contains documents

supporting the supervisory processes.

•

Database enhancements. In 2014, the supervisory

information technology function strengthened

capabilities in the areas of data collection and data

stewardship, implemented new tools for the analy-

sis of large volumes of data, and enhanced data

acquisition and analysis through the deployment of

new or improved applications. The NIC team has

also continued to partner with the Board’s Off ice

of the Chief Data Officer to collaborate on enter-

prise data inventory, application architecture, and

integration activities.

•

Public website and external collaboration. Several

reports were added to the NIC public website,

including the Banking Organization Systemic Risk

Report, snapshots of data used in the calculation

of global systemically important banks, and Risk-

Based Capital Reporting for Institutions Subject to

the Advanced Capital Adequacy Framework

(FFIEC 101). Structure data were made available

in bulk format for attributes, relationships, and

transformation information for holding companies

with total assets greater than $10 billion. In addi-

tion, steps were taken to improve collaboration

with other agencies in terms of sharing institution-

specific financial data.

Staff Development

The Federal Reserve’s staff development program

supports the ongoing development of about 3,000

professional supervisory staff, ensuring that they have

the skills necessary to meet their evolving supervisory

responsibilities. The Federal Reserve also provides

course offerings to staff at state banking agencies.

Training activities in 2014 are summarized in

table 3.

Examiner Commissioning Program

The Federal Reserve System’s commissioning pro-

gram for assistant examiners is set forth in the Exam-

iner Commissioning Program (SR letter 98-02).

Examiners choose one of two specialty tracks—

(1) safety and soundness or (2) consumer compliance.

On average, individuals move through a combination

of classroom offerings, self-paced learning, and

on-the-job training over a period of three years.

Achievement is measured by completing the required

course content, demonstrating adequate on-the-job

knowledge, and passing a professionally validated

proficiency examination.

In 2014, 156 examiners passed the first proficiency

exam (113 in safety and soundness and 43 in con-

sumer compliance).

SR letter 98-02 is available at www.federalreserve.gov/

boarddocs/srletters/1998/sr9802.htm

Table 3. Training for banking supervision and regulation, 2014

Course sponsor or type

Number of enrollments

Instructional time

(approximate training

days)

Number of course

offerings

Federal Reserve

personnel

State and federal

banking agency

personnel

Federal Reserve System 1,948 489 838 1,892

FFIEC 7,445 336 428 107

Rapid Response

17,146 4,022 11 90

Training days are approximate. System courses were calculated using five days as an average, with FFIEC courses calculated using four days as an average.

Rapid Response

is a virtual program created by the Federal Reserve System as a means of providing information on emerging topics to Federal Reserve and state bank

examiners.

70 101st Annual Report | 2014

Currently, the Federal Reserve is undertaking a major

initiative to modernize its Community Bank Exam-

iner Commissioning Program. Additionally, efforts

are underway to build an Examiner Commissioning

Program for Large Financial Institutions.

Continuing Professional Development

As part of an ongoing strategic effort related to

learning and development, the Federal Reserve is

enhancing continuing professional development

through the addition and modernization of several

courses, tools, and programs.

Technical, professional, and leadership skill develop-

ment opportunities are available to examiners in a

blended learning approach. This includes self-study

materials, online virtual learning options, and tradi-

tional classroom instruction. Schools, conferences,

and programs covering a variety of regulatory topics

are offered within the System, Board, and FFIEC.

System programs are also available to state and fed-

eral banking agency personnel.

Regulation

The Federal Reserve exercises important regulatory

influence over entry into the U.S. banking system

structure through its administration of several federal

statutes. The Federal Reserve is also responsible for

imposing margin requirements on securities transac-

tions. In carrying out its responsibilities, the Federal

Reserve coordinates supervisory activities with the

other federal banking agencies, state agencies, func-

tional regulators (that is, regulators for insurance,

securities, and commodities firms), and foreign bank

regulatory agencies.

Regulation of the U.S. Banking Structure

The Federal Reserve administers six federal statutes

that apply to BHCs, financial holding companies,

member banks, SLHCs, and foreign banking organi-

zations: the BHC Act, the Bank Merger Act, the

Change in Bank Control Act, the Federal Reserve

Act, section 10 of the Home Owners Loan Act

(HOLA), and the International Banking Act.

In administering these statutes, the Federal Reserve

acts on a variety of applications and notices that

directly or indirectly affect the structure of the U.S.

banking system at the local, regional, and national

levels; the international operations of domestic bank-

ing organizations; or the U.S. banking operations of

foreign banks. The applications and notices concern

BHC and SLHC formations and acquisitions, bank

mergers, and other transactions involving banks and

savings associations or nonbank firms. In 2014, the

Federal Reserve acted on 1,133 applications filed

under the six statutes.

In 2014, the Federal Reserve released its first Semian-

nual Report on Banking Applications Activity, which

provides aggregate information on proposals filed by

banking organizations and reviewed by the Federal

Reserve. The report includes statistics on the number

of proposals that have been approved, denied, and

withdrawn, as well as general information about the

length of time taken to process proposals. Addition-

ally, the report discusses common reasons that pro-

posals have been withdrawn from consideration. The

first report is available at

www.federalreserve.gov/

newsevents/press/other/20141124a.htm

Bank Holding Company Act Applications

Under the BHC Act, a corporation or similar legal

entity must obtain the Federal Reserve’s approval

before forming a BHC through the acquisition of

one or more banks in the United States. Once

for med, a BHC must receive Federal Reserve

approval before acquiring or establishing additional

banks. Also, BHCs generally may engage in only

those nonbanking activities that the Board has previ-

ously determined to be closely related to banking

under section 4(c)(8) of the BHC Act.

Depending

on the circumstances, these activities may or may not

require Federal Reserve approval in advance of their

commencement.

When reviewing a BHC application or notice that

requires approval, the Federal Reserve considers the

financial and managerial resources of the applicant,

the future prospects of both the applicant and the

firm to be acquired, financial stability factors, the

convenience and needs of the community to be

served, the potential public benefits, the competitive

effects of the application, and the applicant’s ability

to make available to the Federal Reserve information

deemed necessary to ensure compliance with appli-

cable law. The Federal Reserve also must consider the

views of the U.S. Department of Justice regarding

Since 1996, the BHC Act has provided an expedited prior notice

procedure for certain permissible nonbank activities and for

acquisitions of small banks and nonbank entities. Since that

time, the BHC Act has also permitted well-run BHCs that sat-

isfy certain criteria to commence certain other nonbank activi-

ties on a de novo basis without f irst obtaining Federal Reserve

approval.

Supervision and Regulation 71

the competitive aspects of any proposed BHC acqui-

sition involving unaffiliated insured depository insti-

tutions. In the case of a foreign banking organization

seeking to acquire control of a U.S. bank, the Federal

Reserve also considers whether the foreign bank is

subject to comprehensive supervision or regulation

on a consolidated basis by its home-country supervi-

sor. In 2014, the Federal Reserve acted on 253 appli-

cations and notices f iled by BHCs to acquire a bank

or a nonbank firm, or to otherwise expand their

activities.

A BHC may repurchase its own shares from its

shareholders. Certain stock redemptions require

prior Federal Reserve approval. The Federal Reserve

may object to stock repurchases by holding compa-

nies that fail to meet certain standards, including the

Board’s capital adequacy guidelines. In 2014, the

Federal Reserve acted on six stock repurchase appli-

cations by BHCs.

The Federal Reserve also reviews elections submitted

by BHCs seeking financial holding company status

under the authority granted by the Gramm-Leach-

Bliley Act. BHCs seeking financial holding company

status must file a written declaration with the Federal

Reserve. In 2014, 32 domestic financial holding com-

pany declarations were approved.

Bank Merger Act Applications

The Bank Merger Act requires that all applications

involving the merger of insured depository institu-

tions be acted on by the relevant federal banking

agency. The Federal Reserve has primary jurisdiction

if the institution surviving the merger is a state mem-

ber bank. In acting on a merger application, the Fed-

eral Reserve considers the financial and managerial

resources of the applicant, the future prospects of the

existing and combined organizations, financial stabil-

ity factors, the convenience and needs of the commu-

nities to be served, and the competitive effects of the

proposed merger. The Federal Reserve also must con-

sider the views of the U.S. Department of Justice

regarding the competitive aspects of any proposed

bank merger involving unaffiliated insured deposi-

tory institutions. In 2014, the Federal Reserve

approved 70 merger applications under the Bank

Merger Act.

Change in Bank Control Act Applications

The Change in Bank Control Act requires individuals

and certain other parties that seek control of a U.S.

bank, BHC, or SLHC to obtain approval from the

relevant federal banking agency before completing

the transaction. The Federal Reserve is responsible

for reviewing changes in the control of state member

banks, BHCs, and SLHCs. In its review, the Federal

Reserve considers the financial position, competence,

experience, and integrity of the acquiring person; the

effect of the proposed change on the financial condi-

tion of the bank, BHC, or SLHC being acquired; the

future prospects of the institution to be acquired; the

effect of the proposed change on competition in any

relevant market; the completeness of the information

submitted by the acquiring person; and whether the

proposed change would have an adverse effect on the

Deposit Insurance Fund. A proposed transaction

should not jeopardize the stability of the institution

or the interests of depositors. During its review of a

proposed transaction, the Federal Reserve also may

contact other regulatory or law enforcement agencies

for information about relevant individuals. In 2014,

the Federal Reserve approved 131 change in control

notices.

Federal Reserve Act Applications

Under the Federal Reserve Act, a bank must seek

Federal Reserve approval to become a member bank.

A member bank may be required to seek Federal

Reserve approval before expanding its operations

domestically or internationally. State member banks

must obtain Federal Reserve approval to establish

domestic branches, and all member banks (including

national banks) must obtain Federal Reserve

approval to establish foreign branches. When review-

ing applications for membership, the Federal Reserve

considers, among other things, the bank’s financial

condition and its record of compliance with banking

laws and regulations. When reviewing applications to

establish domestic branches, the Federal Reserve con-

siders, among other things, the scope and nature of

the banking activities to be conducted. When review-

ing applications for foreign branches, the Federal

Reserve considers, among other things, the condition

of the bank and the bank’s experience in interna-

tional banking. In 2014, the Federal Reserve acted on

47 membership applications, 525 new and merger-

related domestic branch applications, and one foreign

branch application.

State member banks also must obtain Federal

Reserve approval to establish financial subsidiaries.

These subsidiaries may engage in activities that are

financial in nature or incidental to financial activities,

72 101st Annual Report | 2014

including securities-related and insurance agency-

related activities. In 2014, one financial subsidiary

application was approved.

Home Owners’ Loan Act Applications

Under HOLA, a corporation or similar legal entity

must obtain the Federal Reserve’s approval before

for ming an SLHC through the acquisition of one or

more savings associations in the United States. Once

for med, an SLHC must receive Federal Reserve

approval before acquiring or establishing additional

savings associations. Also, SLHCs generally may

engage in only those nonbanking activities that are

specifically enumerated in HOLA or that the Board

has previously determined to be closely related to

banking under section 4(c)(8) of the BHC Act.

Depending on the circumstances, these activities may

or may not require Federal Reserve approval in

advance of their commencement. In 2014, the Fed-

eral Reserve acted on 29 applications filed by SLHCs

to acquire a bank or a nonbank firm, or to otherwise

expand their activities.

Under HOLA, a savings association reorganizing to

a mutual holding company (MHC) structure must

receive Federal Reserve approval prior to its reorgani-

zation. In addition, an MHC must receive Federal

Reserve approval before converting to stock form,

and MHCs must receive Federal Reserve approval

before waiving dividends declared by the MHC’s

subsidiary. In 2014, the Federal Reserve acted on no

applications for MHC reorganizations. In 2014, the

Federal Reserve acted on nine applications filed by

MHCs to convert to stock for m, and seven applica-

tions to waive dividends.

When reviewing an SLHC application or notice that

requires approval, the Federal Reserve considers the

financial and managerial resources of the applicant,

the future prospects of both the applicant and the

firm to be acquired, the convenience and needs of the

community to be served, the potential public benefits,

the competitive effects of the application, and the

applicant’s ability to make available to the Federal

Reserve information deemed necessary to ensure

compliance with applicable law. The Federal Reserve

also must consider the views of the U.S. Department

of Justice regarding the competitive aspects of any

SLHC proposal involving the acquisition or merger

of unaffiliated insured depository institutions.

The Federal Reserve also reviews elections submitted

by SLHCs seeking status as f inancial holding compa-

nies under the authority granted by the Dodd-Frank

Act. SLHCs seeking financial holding company sta-

tus must file a written declaration with the Federal

Reserve. In 2014, three SLHC financial holding com-

pany declarations were approved.

Overseas Investment Applications by

U.S. Banking Organizations

U.S. banking organizations may engage in a broad

range of activities overseas. Many of the activities are

conducted indirectly through Edge Act and agree-

ment corporation subsidiaries. Although most for-

eign investments are made under general consent pro-

cedures that involve only after-the-fact notification to

the Federal Reserve, large and other significant

investments require prior approval. In 2014, the Fed-

eral Reserve approved 15 applications and notices for

overseas investments by U.S. banking organizations,

many of which represented investments through an

Edge Act or agreement corporation.

International Banking Act Applications

The International Banking Act, as amended by the

Foreign Bank Supervision Enhancement Act of

1991, requires foreign banks to obtain Federal

Reserve approval before establishing branches, agen-

cies, commercial lending company subsidiaries, or

representative offices in the United States.

In reviewing applications, the Federal Reserve gener-

ally considers whether the foreign bank is subject to

comprehensive supervision or regulation on a con-

solidated basis by its home-country supervisor. It

also considers whether the home-country supervisor

has consented to the establishment of the U.S. office;

the financial condition and resources of the foreign

bank and its existing U.S. operations; the managerial

resources of the foreign bank; whether the home-

country supervisor shares information regarding the

operations of the foreign bank with other supervi-

sory authorities; whether the foreign bank has pro-

vided adequate assurances that information concern-

ing its operations and activities will be made available

to the Federal Reserve, if deemed necessary to deter-

mine and enforce compliance with applicable law;

whether the foreign bank has adopted and imple-

mented procedures to combat money laundering and

whether the home country of the foreign bank is

developing a legal regime to address money launder-

ing or is participating in multilateral efforts to com-

bat money laundering; and the record of the foreign

bank with respect to compliance with U.S. law. In

2014, the Federal Reserve approved four applications

by foreign banks to establish branches, agencies, or

representative offices in the United States.

Supervision and Regulation 73

Public Notice of Federal Reserve Decisions

Certain decisions by the Federal Reserve that involve

an acquisition by a BHC, a bank merger, a change in

control, or the establishment of a new U.S. banking

presence by a foreign bank are made known to the

public by an order or an announcement. Orders state

the decision, the essential facts of the application or

notice, and the basis for the decision; announcements

state only the decision. All orders and announce-

ments are made public immediately and are subse-

quently reported in the Board’s weekly H.2 statistical

release. The H.2 release also contains announcements

of applications and notices received by the Federal

Reserve upon which action has not yet been taken.

For each pending application and notice, the related

H.2A release gives the deadline for comments. The

Board’s website provides information on orders and

announcements (

www.federalreserve.gov/newsevents/

press/orders/2014orders.htm

) as well as a guide for

U.S. and foreign banking organizations that wish to

submit applications (

www.federalreserve.gov/

bankinforeg/afi/afi.htm

Enforcement of Other Laws

and Regulations

The Federal Reserve’s enforcement responsibilities

also extend to the disclosure of financial information

by state member banks and the use of credit to pur-

chase and carry securities.

Financial Disclosures by State Member Banks

Under the Securities Exchange Act of 1934 and Fed-

eral Reserve’s Regulation H, certain state member

banks are required to make financial disclosures to

the Federal Reserve using the same reporting forms

(such as Form 10K—annual report and Sched-

ule 14A—proxy statement) that are normally used by

publicly held entities to submit infor mation to the

Securities Exchange Commission.

As most of the

publicly held banking organizations are BHCs and

the reporting threshold was recently raised, only two

state member banks were required to submit data to

the Federal Reserve in 2014. The information submit-

ted by these two small state member banks is avail-

able to the public upon request and is primarily used

for disclosure to the bank’s shareholders and public

investors.

Securities Credit

Under the Securities Exchange Act of 1934, the

Board is responsible for regulating credit in certain

transactions involving the purchasing or carrying of

securities. The Board’s Regulation T limits the

amount of credit that may be provided by securities

brokers and dealers when the credit is used to pur-

chase debt and equity securities. The Board’s Regula-

tion U limits the amount of credit that may be pro-

vided by lenders other than brokers and dealers when

the credit is used to purchase or carry publicly held

equity securities if the loan is secured by those or

other publicly held equity securities. The Board’s

Regulation X applies these credit limitations, or mar-

gin requirements, to certain borrowers and to certain

credit extensions, such as credit obtained from for-

eign lenders by U.S. citizens.

Several regulatory agencies enforce the Board’s secu-

rities credit regulations. The SEC, the Financial

Industry Regulatory Authority, and the Chicago

Board Options Exchange examine brokers and deal-

ers for compliance with Regulation T. With respect to

compliance with Regulation U, the federal banking

agencies examine banks under their respective juris-

dictions; the Farm Credit Administration and the

NCUA examine lenders under their respective juris-

dictions; and the Federal Reserve examines other

Regulation U lenders.

Under Section 12(g) of the Securities Exchange Act, certain

companies that have issued securities are subject to SEC regis-

tration and filing requirements that are similar to those imposed

on public companies. Per Section 12(i) of the Securities

Exchange Act, the powers of the SEC over banking entities that

fall under Section 12(g) are vested with the appropriate banking

regulator. Specifically, state member banks with 2,000 or more

shareholders and more than $10 million in total assets are

required to register with, and submit data to, the Federal

Reserve. These thresholds reflect the recent amendments by the

Jumpstart Our Business Startups Act (JOBS Act).

74 101st Annual Report | 2014

Consumer and

Community Affairs

The Division of Consumer and Community Affairs

(DCCA) has primary responsibility for carrying out

the Board of Governor’s role in consumer financial

protection and community development. DCCA con-

ducts consumer-focused supervision, research, and

policy analysis, as well as implements relevant statu-

tory requirements and facilitates community develop-

ment. Through these efforts, the division works to

ensure that consumer and community perspectives

inform Federal Reserve policy, actions, and research

in advancing DCCA’s mission to promote a fair and

transparent consumer financial services marketplace

and effective community development.

Throughout 2014, the division engaged in numerous

consumer and community-related functions and

policy activities in the following areas:

•

Formulating consumer-focused supervision and

examination policy to ensure that financial institu-

tions for which the Federal Reserve has authority

comply with consumer protection and meet require-

ments of community reinvestment laws and regula-

tions. The division provided oversight for the

Reserve Bank consumer compliance supervision

and examination programs in state member banks

and bank holding companies (BHCs) through its

policy development, examiner training, and super-

vision oversight programs, which include enforce-

ment of fair lending, unfair or deceptive acts or

practices (UDAP), and flood insurance rules;

analysis of bank and BHC applications in regard

to consumer protection; and processing of con-

sumer complaints.

•

Conducting rigorous research, analysis, and data

collection to inform Federal Reserve and other poli-

cymakers about consumer protection and community

economic development issues and opportunities. The

division analyzed emerging issues in consumer

financial services research, policies, and practices in

order to understand their implications for the eco-

nomic and supervisory policies that are core to the

central bank’s functions, as well as to gain insight

into consumer decisionmaking related to financial

services, implications of the financial crisis on

young workers, and access to credit for small

businesses.

•

Engaging, convening, and informing key stakehold-

ers to identify emerging issues and advance what

works in community reinvestment and consumer pro-

tection. The division continued to promote fair and

informed access to financial markets for all con-

sumers, particularly the needs of underserved

populations, by engaging lenders, government offi-

cials, and community leaders. Throughout the year,

DCCA convened programs to share information

and research on effective community development

policies and strategies.

•

Writing and reviewing regulations that effectively

implement consumer protection and community rein-

vestment laws. The division manages the Board’s

regulatory responsibilities with respect to certain

entities and specific statutory provisions of the

consumer financial services and fair lending laws.

DCCA drafted regulations and issued interpreta-

tions and compliance guidance for the industry and

the Reserve Banks.

Supervision and Examinations

DCCA develops and supports supervisory policy and

examination procedures for consumer protection

laws and regulations, as well as the Community Rein-

vestment Act (CRA), as part of its supervision of the

organizations for which the Board has authority,

including holding companies, state member banks,

and foreign banking organizations. The division also

administers the Federal Reserve System’s risk-

focused program for assessing consumer compliance

risk at the largest bank and financial holding compa-

nies in the System, with division staff ensuring that

consumer compliance risk is effectively integrated

into the consolidated supervision oversight of the

holding company. The division oversees the efforts of

the 12 Reserve Banks to ensure that consumer pro-

tection laws and regulations are rigorously and con-

sistently enforced for the 850 state member banks

that the Federal Reserve supervises for compliance

with consumer protection and community reinvest-

ment laws and regulations. Division staff provide

guidance and expertise to the Reserve Banks on con-

sumer protection laws and regulations, bank and

BHC application analysis and processing, examina-

tion and enforcement techniques and policy matters,

examiner training, and emerging issues. Finally, staff

members participate in interagency activities that

promote consistency in examination principles, stan-

dards, and processes.

Examinations are one of the Federal Reserve’s meth-

ods of ensuring compliance with consumer protec-

tion laws and assessing the adequacy of consumer

compliance risk-management systems within regu-

lated entities. During 2014, the Reserve Banks com-

pleted 225 consumer compliance examinations of

state member banks and 31 examinations of foreign

banking organizations, 1 examination of an Edge

Act corporation, and 1 examination of an agreement

corporation.

Bank Holding Company

Consolidated Supervision

During 2014, staff reviewed more than 115 bank and

financial holding companies to ensure consumer

compliance risk was appropriately incorporated into

the consolidated risk-management program for the

organization. Division staff participated with staff

from the Board’s Division of Banking Supervision

and Regulation on numerous projects related to

ongoing implementation of the Dodd-Frank Wall

Street Reform and Consumer Protection Act of 2010

(Dodd-Frank Act), including standards for assessing

corporate governance and continued integration of

savings and loan holding companies (SLHCs) under

Federal Reserve supervision.

In November 2014, the Federal Reserve issued a

detailed listing of Federal Reserve supervisory guid-

ance documents that are applicable to SLHCs.

The

listing is supplemental to previously issued guidance

that informed SLHCs to comply with Federal

Reserve guidance and not Office of Thrift Supervi-

sion (OTS) guidance issued prior to July 21, 2011—

the date that supervision and regulation of SLHCs

transferred from the OTS to the Federal Reserve.

Mortgage Servicing and Foreclosure

Payment Agreement Status

Throughout 2014, Board staff continued to work to

oversee and implement the enforcement actions

against 16 mortgage loan servicers that were issued

by the Federal Reserve and the Office of the Comp-

troller of the Currency (OCC) between April 2011

and April 2012. At that time, along with other

requirements, the two regulators directed servicers to

retain independent consultants to conduct compre-

hensive reviews of foreclosure activity to determine

whether eligible

borrowers suffered financial injury

because of servicer errors, misrepresentations, or

other deficiencies. The file review initiated by the

independent consultants, combined with a significant

borrower outreach process, was referred to as the

Independent Foreclosure Review (IFR).

In 2013, the regulators entered into agreements with

15 of the mortgage loan servicers to replace the IFR

with direct cash payments to all eligible borrowers

and other assistance (the Payment Agreement).

The

participating servicers agreed to pay an estimated

$3.9 billion to 4.4 million borrowers whose primary

residence was in a foreclosure process in 2009 or

2010. The Payment Agreement also required the ser-

vicers to contribute an additional $5.8 billion dollars

in other foreclosure prevention assistance, such as

loan modifications and forgiveness of deficiency

judgments. For the participating servicers, fulfillment

of the agreement will satisfy the foreclosure review

requirements of the enforcement actions issued by

the regulators in 2011 and 2012. The Payment Agree-

ment did not affect the servicers’ continuing obliga-

tions under the enforcement actions to address defi-

In 2013, DCCA began reporting the number of examinations

completed based on the calendar year (from January 1 to

December 31); in prior years, numbers had been reported for the

period from July 1 through June 30. Agency and branch offices

of foreign banking organizations, Edge Act corporations, and

agreement corporations fall under the Federal Reserve’s purview

for consumer compliance activities. An agreement corporation is

a type of bank chartered by a state to engage in international

banking. The bank “agrees” with the Federal Reserve Board to

limit its activities to those allowed an Edge Act corporation. An

Edge Act corporation is a banking institution with a special

charter from the Federal Reserve to conduct international bank-

ing operations and certain other forms of business without com-

plying with state-by-state banking laws. By setting up or invest-

ing in Edge Act corporations, U.S. banks are able to gain portfo-

lio exposure to financial investing operations not available under

standard banking laws.

For more information, see www.federalreserve.gov/bankinforeg/

srletters/sr1409.htm

Borrowers were eligible if their primary residence was in a fore-

closure action with one of the 16 mortgage loan servicers at any

time in 2009 or 2010.

One OCC-regulated servicer elected to complete the Indepen-

dent Foreclosure Review, and did not, therefore, enter into the

Payment Agreement.

76 101st Annual Report | 2014

ciencies in their mortgage servicing and foreclosure

policies and procedures.

A paying agent, Rust Consulting, Inc., (Rust) was

retained to administer payments to borrowers on

behalf of the participating servicers. Beginning in

April 2013, a letter with an enclosed check was sent

to borrowers who had a foreclosure action initiated,

pending, or completed in 2009 or 2010 with any of

the participating servicers. Letters with checks were

mailed to eligible borrowers throughout 2013 and

2014, including checks that were reissued upon the

borrower’s request due to expiration, a request for a

change in payee, or a request by borrowers to split

the check amongst the borrowers on the loan. For

checks that have not been cashed or were returned

undeliverable, the agencies directed Rust to expand

its efforts to locate more-current address information

for the unpaid borrowers. This resulted in additional

consumers receiving payments under the agreements,

with replacement checks scheduled to be sent to any

updated address or the last known address on record

for those borrowers who have not yet cashed their

checks.

As of December 31, 2014, $3.4 billion has been dis-

tributed through 3.7 million checks, representing

87 percent of the total value of the funds. Receiving a

payment under the agreement will not prevent bor-

rowers from taking any action they may wish to pur-

sue related to their foreclosure. Servicers are not per-

mitted to ask borrowers to sign a waiver of any legal

claims they may have against their servicer in connec-

tion with receiving payment.

Foreclosure Prevention Actions

The Payment Agreement also required servicers to

undertake well-structured loss-mitigation efforts

focused on foreclosure prevention, with preference

given to activities designed to keep borrowers in their

homes through affordable, sustainable, and meaning-

ful home preservation actions within two years from

the date the agreement in principle was reached. The

foreclosure prevention actions are expected to pro-

vide significant and meaningful relief or assistance to

qualified borrowers and, as stated in the agreement,

“should not disfavor a specific geography within or

among states, nor disfavor low and/or moderate

income borrowers, and not discriminate against any

protected class.”

Servicers may fulfill their obligations through three

specific consumer-relief activities set forth in the

National Mortgage Settlement, including first-lien

loan modifications, second-lien loan modifications,

and short sales or deeds-in-lieu of foreclosure. Ser-

vicers were given the option, subject to non-objection

from their regulator, to meet their foreclosure preven-

tion assistance requirements by paying additional

cash into the qualified settlement funds to be used for

direct payments to consumers or by providing cash

or other resource commitments to borrower counsel-

ing or education. Several of the participating ser-

vicers chose this option and have met their foreclo-

sure prevention obligations.

As of December 31, 2014, all servicers have submit-

ted reports detailing the consumer-relief actions they

have taken to satisfy these requirements. The foreclo-

sure prevention assistance actions reported include

loan modifications, short sales, deeds-in-lieu of fore-

closure, debt cancellation, and lien extinguishment.

In order to receive credit toward the servicer’s total

foreclosure prevention obligation, the actions submit-

ted must be validated by the regulators. A process has

been established for a third party to conduct this vali-

dation and ensure that the foreclosure prevention

assistance amounts meet the requirements of the

amendments to the enforcement actions.

Servicer Efforts to Address Deficiencies

In addition to the foreclosure review requirements,

the enforcement actions required mortgage servicers

to submit acceptable written plans to address various

mortgage loan servicing and foreclosure processing

deficiencies. In the time since the enforcement actions

were issued, the banking organizations have been

implementing the action plans, including enhanced

controls, and improving systems and processes. To

date, the supervisory review of the mortgage ser-

vicers’ action plans has shown that the banking orga-

nizations under the enforcement actions have imple-

mented significant corrective actions with regard to

their mortgage servicing and foreclosure processes,

but that some additional actions need to be taken.

Federal Reserve supervisory teams will continue to

monitor and evaluate the servicers’ progress on

implementing the action plans to address unsafe and

unsound mortgage servicing and foreclosure prac-

tices as required by the enforcement actions.

In July 2014, the Federal Reserve Board published a

report regarding the IFR and the Payment Agree-

ment that replaced the IFR. The report, which

focused primarily on servicers regulated by the Fed-

For more information, see www.federalreserve.gov/

consumerinfo/independent-foreclosure-review-payment-

agreement.htm

Consumer and Community Affairs 77

eral Reserve, provides information on the process for

the review of the foreclosure files during the IFR and

file-review results—including servicer error rates dur-

ing the IFR—up to the time the IFR was replaced.

In addition, the report contains information on

direct borrower payments and other assistance from

the Payment Agreement and discusses the Federal

Reserve’s ongoing supervision of corrective actions

the mortgage servicers are required to implement.

After the Payment Agreement has been fully imple-

mented, the Federal Reserve expects to publish data

on the final status of the cash payments and the fore-

closure prevention assistance as well as the status of

corrective actions implemented by the mortgage

servicers.

Supervisory Matters

Risk-Focused Supervision

On January 1, 2014, the Board implemented a new

Community Bank Risk-Focused Consumer Compli-

ance Supervision Program for state member banks

with consolidated assets of $10 billion or less and

their subsidiaries. The new program is designed to

promote strong compliance risk-management prac-

tices and consumer protection at state member com-

munity banks. Under the updated program, con-

sumer compliance examiners base the examination

intensity more explicitly on the individual financial

institution’s risk profile, including its consumer com-

pliance culture and how effectively it identifies and

manages consumer compliance risk. The new pro-

gram is intended to enhance the efficacy of the

Board’s supervision program and reduce regulatory

burden on many community banking organizations.

To ensure effective implementation of the Commu-

nity Bank Risk-Focused Consumer Compliance

Supervision Program, the Board undertook several

examiner training and banker outreach initiatives.

Consumer compliance examiner training was deliv-

ered through two Rapid Response webinars (dis-

cussed further in this section under “

Ongoing Train-

ing Opportunities

”) and a daylong case study exer-

cise conducted at each Reserve Bank. Banker

outreach was provided in a public Outlook Live

webinar in March 2014 and a Consumer Compliance

Outlook newsletter

article in the second-quarter

2014 edition.

In addition, the Board issued an enhanced examina-

tion frequency policy to complement the new Com-

munity Bank Risk-Focused Supervision Program.

The frequency policy promotes effective supervision

through deployment of examiner resources commen-

surate with an institution’s size, compliance rating,

and CRA rating while reducing burden on many

community banks. This new policy expands the num-

ber of financial institutions subject to a longer con-

sumer compliance and CRA examination frequency

cycle, as follows:

•

48 or 60 months for banks with assets less than

$350 million and satisfactory or better compliance

and CRA ratings (formerly the threshold was

$250 million)

•

36 months for financial institutions with assets

between $350 million and $1 billion and satisfac-

tory or better compliance and CRA ratings (for-

merly 24 months)

The new examination policy does not affect financial

institutions with assets less than $250 million and

those with assets more than or equal to $1 billion.

The exam frequency schedule remains the same for

these financial institutions and institutions with less

than satisfactory compliance and/or CRA ratings, as

follows:

•

48 or 60 months for institutions with assets less

than $250 million and satisfactory or better com-

pliance and CRA ratings (48 months if the CRA

rating is satisfactory; 60 months if the rating is

outstanding)

•

24 months for institutions with assets greater than

or equal to $1 billion and satisfactory or better

compliance and CRA ratings

•

12 months for any institution with less than satis-

factory ratings for either compliance or CRA

The report is available at www.federalreserve.gov/publications/

other-reports/files/independent-foreclosure-review-2014.pdf

For more information, see www.federalreserve.gov/boarddocs/

supmanual/supervision_cch.htm

Outlook Live is the Federal Reserve System’s audio conference

series on consumer compliance issues. For more information on

this webinar, see

https://consumercomplianceoutlook.org/

outlook-live/2014/community-bank-risk-focused-consumer-

compliance-supervision-program/

Consumer Compliance Outlook is a Federal Reserve System pub-

lication dedicated to consumer compliance issues. For more

information on this newsletter article, see

https://

consumercomplianceoutlook.org/2014/second-quarter/risk-

focused-consumer-compliance-supervision-program-for-

community-banks/

78 101st Annual Report | 2014

Enforcement Activities

Fair Lending and UDAP Enforcement

With respect to fair lending, pursuant to provisions

of the Dodd-Frank Act that took effect July 21,

2011, the Consumer Financial Protection Bureau

(CFPB) supervises state member banks with assets of

more than $10 billion for compliance with the Equal

Credit Opportunity Act (ECOA). The Board also has

supervisory authority for compliance with the Fair

Housing Act. For the 829 state member banks with

assets of $10 billion or less, the Board retains the

authority to enforce both the ECOA and the Fair

Housing Act. With respect to the Federal Trade

Commission Act, which prohibits UDAP, the Board

has supervisory authority over state member banks,

regardless of asset siz e.

Fair lending and UDAP reviews are conducted regu-

larly within the supervisory cycle. Additionally,

examiners may conduct fair lending and UDAP

reviews outside of the usual supervisory cycle, if war-

ranted by fair lending and UDAP risk. When exam-

iners find evidence of potential discrimination or

potential UDAP violations, they work closely with

DCCA’s Fair Lending Enforcement Section, which

provides additional legal and statistical expertise and

ensures that fair lending and UDAP laws are

enforced consistently and rigorously throughout the

Federal Reserve System.

With respect to fair lending, pursuant to the ECOA,

if the Board has reason to believe that a creditor has

engaged in a pattern or practice of discrimination in

violation of the ECOA, the matter will be referred to

the Department of Justice (DOJ). The DOJ reviews

the referral and determines whether further investiga-

tion is warranted. A DOJ investigation may result in

a public civil enforcement action or settlement. Alter-

natively, the DOJ may decide to return the matter to

the Board for administrative enforcement. When a

matter is returned to the Board, staff ensure that the

institution takes all appropriate corrective action.

There were no referrals to the DOJ in 2014.

If there is a UDAP or fair lending violation that does

not constitute a pattern or practice under ECOA, the

Federal Reserve acts on its own to ensure that the

violation is remedied by the bank. Most lenders read-

ily agree to correct fair lending and UDAP violations.

In fact, lenders often take corrective action as soon as

they become aware of a problem. Thus, the Federal

Reserve generally uses informal supervisory tools

(such as memoranda of understanding between

banks’ boards of directors and the Reserve Banks, or

board resolutions) to ensure that violations are cor-

rected. When necessary, the Board can bring public

enforcement actions.

Given the complexity of this area of supervision, the

Federal Reserve seeks to provide clarity on its per-

spectives and processes to the industry and the pub-

lic. DCCA staff participates in numerous meetings,

conferences, and trainings sponsored by consumer

advocates, industry representatives, and interagency

groups. Fair Lending Enforcement staff meet regu-

larly with consumer advocates, supervised institu-

tions, and industry representatives to discuss fair

lending matters and receive feedback. Through this

outreach, the Board is able to address emerging fair

lending issues and promote sound fair lending com-

pliance. For example, in 2014, the Board sponsored a

free interagency webinar on fair lending supervision

through Compliance Outlook Live, which was

attended by more than 5,000 registrants, most of

which were community banks.

In 2014, the Board issued a consent order to cease

and desist and a civil money penalty assessment of

$3.5 million against an institution and its non-bank

agent for deceptive practices associated with an

account that was in violation of the Federal Trade

Commission Act.

The actions addressed in this order involved several

practices that, at various points in the financial aid

refund selection process, misled students about vari-

ous aspects of the account, including terms and

fees.

Flood Insurance

The National Flood Insurance Act imposes certain

requirements on loans secured by buildings or mobile

homes located in, or to be located in, areas deter-

mined to have special flood hazards. Under the Fed-

eral Reserve’s Regulation H, which implements the

act, state member banks are generally prohibited

from making, extending, increasing, or renewing any

such loan unless the building or mobile home, as well

as any personal property securing the loan, are cov-

ered by flood insurance for the term of the loan. The

law requires the Board and other federal financial

institution regulatory agencies to impose civil money

For more information and to obtain the webcast, see https://

consumercomplianceoutlook.org/outlook-live/2014/federal-

interagency-fair-lending-hot-topics/

For more information, see www.federalreserve.gov/newsevents/

press/enforcement/20140701b.htm

Consumer and Community Affairs 79

penalties when they find a pattern or practice of vio-

lations of the regulation. The civil money penalties

are payable to the Federal Emergency Management

Agency (FEMA) for deposit into the National Flood

Mitigation Fund.

The enactment of two statutes, the Biggert-Waters

Flood Insurance Reform Act of 2012 (Biggert-

Waters Act) and the Homeowner Flood Insurance

Affordability Act of 2014 (HFIAA), requires the fed-

eral financial institution supervisory agencies to

update certain provisions of the federal flood insur-

ance regulations. To that end, the Board and four

other federal agencies have issued two joint notices of

proposed rulemaking, one in October 2013 and a sec-

ond in October 2014, to implement portions of the

Biggert-Waters Act and HFIAA with respect to pri-

vate flood insurance, the escrow of flood insurance

payments, and the forced placement of flood insur-

ance. The agencies continue work to finalize regula-

tions to implement these statutes.

The Biggert-Waters Act also increased the maximum

limits of building coverage available for non-

condominium residential buildings designed for use

for five or more families, classified as “Other Resi-

dential” buildings. FEMA announced the availability

of insurance under the Standard Flood Insurance

Policy, or SFIP, reflecting these increased maximum

limits effective June 1, 2014. In response to the avail-

ability of SFIPs with the increased limits, the federal

financial institution supervisory agencies issued the

“Interagency Statement on Increased Maximum

Flood Insurance Coverage for Other Residential

Buildings” on May 30, 2014.

This statement con-

veys the agencies’ expectations of supervised institu-

tions with regard to any loans secured by other resi-

dential buildings located in a special flood hazard

area that may be affected by the availability of

increased maximum insurance for these types of

properties.

In 2014, the Federal Reserve issued 14 formal consent

orders and assessed $143,925 in civil money penalties

against state member banks to address violations of

the flood regulations. These statutorily mandated

penalties were forwarded to the National Flood Miti-

gation Fund held by the Department of the Treasury

for the benefit of FEMA.

Community Reinvestment Act

The CRA requires that the Federal Reserve and other

federal banking and thrift regulatory agencies

encourage financial institutions to help meet the

credit needs of the local communities in which they

do business, consistent with safe and sound opera-

tions. To carry out this mandate, the Federal Reserve

•

examines state member banks to assess their com-

pliance with the CRA;

•

considers state member banks’ and bank holding

companies’ CRA performance in context with

other supervisory information when analyzing

applications for mergers and acquisitions; and

•

disseminates information about community devel-

opment techniques to bankers and the public

through Community Development offices at the

Reserve Banks.

The Federal Reserve assesses and rates the CRA per-

for mance of state member banks in the course of

examinations conducted by staff at the 12 Reserve

Banks. During the 2014 reporting period, the Reserve

Banks completed 189 CRA examinations of state

member banks. Of those banks examined, 18 were

rated “Outstanding,” 169 were rated “Satisfactory,”

two were rated “Needs to Improve,” and none were

rated “Substantial Non-Compliance.”

In April, the Board, the OCC, and the Federal

Deposit Insurance Corporation (FDIC) published

revised large-institution CRA examination proce-

dures, which explain how community development

activities that benefit a broader statewide or regional

area that includes an institution’s assessment

area(s) and investments in nationwide funds will be

considered when evaluating an institution’s CRA per-

for mance, assigning ratings, and developing public

performance evaluations. The revised examination

procedures reflect, and are consistent with, revisions

to the Interagency Questions and Answers Regarding

Community Reinvestment that were published in

November 2013.

In September, the Board, the OCC, and the FDIC

proposed additional revisions to the Interagency

The agencies issuing this statement are the Board of Governors,

the Farm Credit Administration, the Federal Deposit Insurance

Corporation (FDIC), the National Credit Union Administra-

tion (NCUA), and the Office of the Comptroller of the Cur-

rency (OCC). For more information, see

www.federalreserve

.gov/bankinforeg/caletters/caltr1403.htm

For more information, see www.ffiec.gov/cra/whatsnew.htm and

www.federalreserve.gov/bankinforeg/caletters/caltr1402.htm.

The Interagency Questions and Answers document provides

additional guidance to financial institutions and the public on

the agencies’ CRA regulations.

80 101st Annual Report | 2014

Questions and Answers.

The proposed guidance

addresses additional questions raised by bankers,

community organizations, and others regarding the

agencies’ CRA regulations. In particular, the pro-

posed revisions to the questions and answers would

•

address alternative systems for delivering retail

banking services;

•

add examples of innovative or flexible lending

practices;

•

address community development-related issues by

(1) clarifying guidance on economic development,

(2) providing examples of community development

loans and activities that are considered to revitalize

or stabilize an underserved nonmetropolitan

middle-income geography, and (3) clarifying how

community development services are evalu-

ated; and

•

offer guidance on how examiners evaluate the

responsiveness and innovativeness of an institu-

tion’s loans, qualified investments, and community

development services.

The agencies are currently reviewing comments

received in response to the proposed revisions to the

Interagency Questions and Answers.

Mergers and Acquisitions

The Federal Reserve analyzes expansionary applica-

tions by banks or BHCs, taking into account the

likely effects of the acquisition on competition, the

convenience and needs of the communities to be

served, the financial and managerial resources and

future prospects of the companies and banks

involved, and the effectiveness of the company’s poli-

cies to combat money laundering. As part of this

process, DCCA evaluates whether the institutions are

currently meeting the convenience and needs of their

communities and existing managerial resources, as

well as the institutions’ ability to meet the conve-

nience and needs of their communities and their

managerial resources after the proposed transaction.

The CRA requires the Federal Reserve to consider a

depository institution’s record of helping to meet the

credit needs of its local communities in evaluating

applications for mergers, acquisitions, and branches.

An institution’s most recent CRA performance

evaluation is a particularly important, and often con-

trolling, consideration in the applications process

because it represents a detailed on-site evaluation of

the institution’s performance under the CRA by its

federal supervisor.

As part of the analysis of managerial resources, the

Federal Reserve reviews the institution’s record of

compliance with consumer protection laws and regu-

lations. The institution’s most recent consumer com-

pliance rating is central to this review because, like

the CRA performance evaluation, it represents the

detailed findings of the institution’s supervisory

agency.

Less than satisfactory CRA or consumer compliance

ratings can pose an impediment to the processing and

approval of the application. Federal Reserve staff

gather additional information about CRA and con-

sumer compliance performance when the financial

institution(s) involved in an application have less

than satisfactory CRA or compliance ratings or

when the Federal Reserve receives comments from

interested parties that raise CRA or consumer com-

pliance issues. To further enhance transparency on

this process, the Board issued guidance to the public

in February 2014 describing the Federal Reserve’s

approach to applications and notices, indicating

those that may not satisfy statutory requirements for

approval of a proposal or otherwise raise supervisory

or regulatory concerns.

The Board provides information on its actions asso-

ciated with these merger and acquisition transactions,

issuing press releases and the Board Orders for

each.

As part of the February 2014 guidance, the

Federal Reserve also informed the industry and pub-

lic that the Federal Reserve would start publishing a

semiannual report that provides pertinent informa-

tion on applications and notices filed with the Fed-

eral Reserve. The first of these reports was issued in

November 2014, covering the first six months of

2014.

The report included statistics on the number

of proposals that had been approved, denied, and

withdrawn, as well as general information about the

length of time taken to process proposals. Addition-

ally, the report discussed common reasons that pro-

posals had been withdrawn from consideration.

Board staff also conducted educational webinars to

For more information, see www.federalreserve.gov/newsevents/

press/bcreg/20140908a.htm

For more information, see www.federalreserve.gov/bankinforeg/

srletters/sr1402.htm

For access to the Board’s Orders on Banking Applications, see

www.federalreserve.gov/newsevents/press/orders/2014orders

.htm

For the report, see www.federalreserve.gov/newsevents/press/

other/20141124a.htm

Consumer and Community Affairs 81

discuss this guidance and report with banking insti-

tutions and members of the public.

Because these

applications are of interest to the public, they often

generate comments that raise various issues for

Board staff to consider in their analyses of the super-

visory and lending records of the applicants. With

respect to consumer compliance and community

reinvestment, commenters often allege that various

institutions fail to make credit available to certain

minority groups and to low- and moderate-income

(LMI) individuals, or when they do extend credit to

those borrowers, it is at a higher cost. Commenters

also often express their view that the institutions fail

to meet the needs of small businesses in LMI geogra-

phies and/or to adequately fulfill their CRA obliga-

tion to meet the credit needs of all of the communi-

ties in their assessment area, particularly LMI areas.

In evaluating the applications and the merits of pub-

lic comments, the Board considers information pro-

vided by applicants and analyzes supervisory infor-

mation, including examination reports with evalua-

tions of compliance with fair lending and other

consumer protection laws and regulations, and con-

fers with other regulators for their supervisory views.

The Board conducts analyses to understand the lend-

ing activities of the applicant and target institutions.

During 2014, the Board considered over 100 applica-

tions—with a range of topics from change in control

notices, to branching requests, to mergers and acqui-

sitions—with outstanding issues involving compli-

ance with consumer protection statutes and regula-

tions, including fair lending laws and the CRA.

DCCA staff analyzed the following 14 unrelated

notices and applications for transactions involving

bank mergers and branching that involved adverse

public comments on CRA issues or consumer com-

pliance issues, such as fair lending, which the Board

considered and approved:

•

Community & Southern Holdings, Inc., Atlanta,

Georgia, to acquire Verity Capital Group, Inc. and

thereby indirectly acquire its subsidiary bank, Ver-

ity Bank, both of Winder, Georgia, was approved

in March.

•

PacWest Bancorp, Los Angeles, California, and its

controlling shareholders, CapGen Capital Group II

LP and CapGen Capital Group II LLC, both of

New York, New York, to acquire CapitalSource

Inc. and thereby indirectly acquire its subsidiary

industrial bank, CapitalSource Bank, both of Los

Angeles, was approved in April.

•

Umpqua Holdings Corporation, Portland, Oregon,

to merge with Sterling Financial Corporation and

thereby acquire its subsidiary bank, Sterling Sav-

ings Bank, both of Spokane, Washington, was

approved in April.

•

Old National Bancorp, Evansville, Indiana, to

merge with Tower Financial Corporation and

thereby indirectly acquire its subsidiary bank,

Tower Bank and Trust Company, both of Fort

Wayne, Indiana, was approved in April.

•

Mercantile Bank Corporation, Grand Rapids, to

merge with Firstbank Corporation, Alma, and

thereby indirectly acquire its subsidiary banks,

Firstbank, Mount Pleasant, and Keystone Com-

munity Bank, Kalamazoo, all of Michigan, and an

election by Mercantile Bank Corporation to

become a financial holding company were

approved in May.

•

Cullen/Frost Bankers, Inc., San Antonio, Texas,

(1) to merge with WNB Bancshares, Inc., and

thereby acquire its subsidiary bank, Western

National Bank, both of Odessa, Texas; (2) to have

Cullen/Frost’s subsidiary state member bank, Frost

Bank, San Antonio, merge with Western National

Bank, with Frost Bank as the surviving entity; and

(3) to have Frost Bank establish and operate

branches at the main office and the branches of

Western National Bank were approved in May.

•

MB Financial, Inc., Chicago, to merge with Taylor

Capital Group, Inc., Rosemont, and thereby indi-

rectly acquire its subsidiary bank, Cole Taylor

Bank, Chicago, all of Illinois, was approved in July.

•

Old National Bancorp, Evansville, Indiana, to

merge with United Bancorp, Inc., and thereby indi-

rectly acquire its subsidiary bank, United Bank &

Trust, both of Ann Arbor, Michigan, was approved

in July.

•

Regions Bank, Bir mingham, Alabama, to establish

a branch in Kingwood, Texas, was approved in

September.

•

First American Bank Corporation, Elk Grove Vil-

lage, Illinois, to acquire Bank of Coral Gables,

Coral Gables, Florida, was approved in November.

The webinars were part of the “Ask the Fed” and “Consumer

Compliance Outlook Live” series. For access to “Ask the Fed,”

see

https://bsr.stlouisfed.org/askthefed/public-users/login.aspx?

ReturnUrl=%2faskthefed%2ffaq

. For access to “Consumer

Compliance Outlook Live,” see

https://

consumercomplianceoutlook.org/outlook-live/

Related notices and applications for which a single Board Order

was issued were counted as a single notice or application in this

total.

82 101st Annual Report | 2014

•

Veritex Community Bank, a state member bank

subsidiary of Veritex Holdings, Inc., both of Dal-

las, Texas, to establish a branch at 2700 Oak Lawn

Avenue, Dallas, Texas, was approved in December.

•

ViewPoint Financial Group, Inc. to merge with

LegacyTexas Group, Inc., and thereby acquire its

subsidiary state member bank, LegacyTexas Bank,

all of Plano, Texas; LegacyTexas Bank to merge

with ViewPoint’s subsidiary bank, ViewPoint

Bank, N.A., Plano, Texas, with LegacyTexas Bank

as the surviving entity; and LegacyTexas Bank to

establish and operate branches at the locations of

the main office and the branches of ViewPoint

Bank were approved in December.

•

Midland States Bancorp, Effingham, Illinois, to

acquire by merger Love Savings Holding Company

and its wholly owned subsidiary, Heartland Bank,

FSB, both of St. Louis, Missouri; Midland States

Bank, Midland’s subsidiary state member bank,

also of Effingham, Illinois, to merge with Heart-

land Bank, with Midland Bank as the surviving

entity; and Midland States Bank to establish and

operate branches at the locations of Heartland

Bank’s main office and branches were approved in

December.

•

A notice by Southside Bancshares, Inc., Tyler,

Texas, to acquire OmniAmerican Bancorp, Inc.,

and thereby indirectly acquire its subsidiary savings

association, OmniAmerican Bank, both of Fort

Worth, Texas, was approved in December.

Coordination with the Consumer Financial

Protection Bureau

During 2014, staff continued to work through the

implementation of the Interagency Memorandum of

Understanding on Supervision Coordination with

the CFPB. The agreement is intended to establish

arrangements for coordination and cooperation

among the CFPB and the OCC, the FDIC, the

National Credit Union Association (NCUA), and the

Board of Governors. The agreement strives to mini-

mize unnecessary regulatory burden and to avoid

unnecessary duplication of effort and conflicting

supervisory directives amongst the prudential regula-

tors. The regulators work cooperatively to share

exam schedules for covered institutions and covered

activities to plan simultaneous exams, provide final

drafts of examination reports for comment, and

share supervisory information.

Coordination with Other

Federal Banking Agencies

The member agencies of the Federal Financial Insti-

tutions Examination Council (FFIEC) develop con-

sistent examination principles, standards, procedures,

and report formats.

In 2014, the FFIEC member

organizations continued to work together on various

initiatives, including developing examination proce-

dures that incorporate amendments to Regulations X

(Real Estate Settlement Procedures Act [RESPA])

and Z (Truth in Lending Act [TILA]) issued by the

CFPB in 2013 that integrate certain mortgage loan

disclosures currently required under TILA and

RESPA. Those amendments will be effective on

August 1, 2015.

Interagency Guidance on Home Equity Lines of

Credit Nearing Their End-of-Draw Periods

In July, the Board—along with the Conference of

State Bank Supervisors, the FDIC, the NCUA, and

the OCC—issued guidance to reiterate principles of

sound risk management for home equity lines of

credit (HELOCs) that have reached or will be reach-

ing their end-of-draw periods.

The guidance articu-

lates the agencies’ expectation that supervised finan-

cial institutions will have adequate risk-management

practices to monitor, manage, and control the risks in

their HELOC portfolios as lines near their end-of-

draw periods as well as to promote compliance with

applicable laws and regulations. In particular, this

HELOC guidance describes risk-management prac-

tices that promote a clear understanding of potential

exposures and help guide consistent, effective

responses to HELOC borrowers who may be unable

to meet contractual obligations at their end-of-draw

periods. The guidance also highlights concepts

related to financial reporting for HELOCs. Addition-

ally, it reminds financial institutions that applicable

consumer protection laws include, but are not limited

to, the Equal Credit Opportunity Act, the Fair Hous-

An adverse comment was also received for a related notice under

the Change in Bank Control Act of 1978, as amended, with

respect to this transaction. The Board approved that notice in

December. For access to notices under the Change in Bank

Control Act, see

www.federalreserve.gov/bankinforeg/

LegalInterpretations/bhc_changeincontrol2014.htm

The FFIEC is a formal interagency body empowered to pre-

scribe uniform principles, standards, and report forms for the

federal examination of financial institutions by the Board of

Governors, the FDIC, the NCUA, the OCC, and the CFPB and

to make recommendations to promote uniformity in the supervi-

sion of financial institutions. In 2006, the State Liaison Com-

mittee (SLC) was added to the council as a voting member. The

SLC includes representatives from the Conference of State Bank

Supervisors, the American Council of State Savings Supervisors,

and the National Association of State Credit Union

Supervisors.

For more information, see www.federalreserve.gov/bankinforeg/

srletters/sr1405.htm

Consumer and Community Affairs 83

ing Act, federal and state prohibitions against UDAP

(such as section 5 of the Federal Trade Commission

Act), RESPA, the Servicemembers Civil Relief Act,

and TILA.

Interagency Guidance Regarding Unfair or

Deceptive Credit Practices

In August, the Board—in conjunction with the

CFPB, the FDIC, the NCUA, and the OCC—issued

guidance regarding certain consumer credit prac-

tices.

The guidance notes that prior to the Dodd-

Frank Act, several rules prohibited banks, savings

associations, and federal credit unions from engaging

in certain credit practices. The Dodd–Frank Act

repealed the rulemaking authority for these credit

practices rules and, consequently, the Board, the

OCC, and the NCUA are repealing those former

rules. This guidance states the agencies’ view that the

unfair or deceptive acts or practices described in

these former credit practices rules, including those in

the Board’s former Regulation AA, could violate the

prohibition against unfair or deceptive acts or prac-

tices in section 5 of the Federal Trade Commission

Act and title X of the Dodd-Frank Act, even in the

absence of a specif ic regulation governing the

conduct.

Examiner Training

Ensuring that financial institutions comply with laws

that protect consumers and encourage community

reinvestment is a fundamental aspect of the bank

examination and supervision process. As the com-

plexity of both consumer financial transactions and

the regulatory landscape has increased, training for

consumer compliance examiners has become more

important than ever before. The division’s examiner

training function is responsible for the ongoing devel-

opment of the professional consumer compliance

supervisory staff, from an initial introduction to the

Federal Reserve System through the development of

proficiency in consumer compliance topics sufficient

to earn an examiner’s commission. DCCA’s role is to

ensure that examiners have the skills necessary to

meet their supervisory responsibilities now and in the

future.

Consumer Compliance Examiner

Training Curriculum

The consumer compliance examiner training curricu-

lum consists of five courses focused on consumer

protection laws, regulations, and examining concepts.

In 2014, these courses were offered in 10 sessions,

and training was delivered to a total of 175 System

consumer compliance examiners and staff members

and 12 state banking agency examiners.

When appropriate, courses are delivered via alterna-

tive methods, such as online or other distance-

learning technologies. For instance, several courses

use a combination of instructional methods, includ-

ing both classroom instruction focused on case stud-

ies and specially developed computer-based instruc-

tion that includes interactive self-check exercises.

Board and Reserve Bank staff regularly review the

core curriculum for examiner training, updating sub-

ject matter and adding new elements as appropriate.

During 2014, staff began migrating introductory

content from a classroom-based training model to

more online delivery, dedicating classroom time for

examiners to apply their learning using case studies

and reviewing loan files.

Outreach and Training: Dodd-Frank Act

During 2014, the CFPB continued to promulgate

new rules pursuant to the Dodd-Frank Act. Board

and CFPB staff collaborated on examiner training

and outreach to bankers. For instance, four Outlook

Live webinars dedicated to the CFPB’s TILA/

RESPA Integrated Disclosures Rule, were broadcast

beginning in June 2014 and continuing through

November 2014. Other Outlook Live webinars cov-

ered issues ranging from general compliance manage-

ment to specific fair lending and community reinvest-

ment matters, for a total of nine compliance-related

broadcasts in 2014.

Ongoing Training Opportunities

In addition to providing core examiner training, the

examiner staff development function emphasizes the

importance of continuing lifelong learning. Opportu-

nities for continuing learning include special projects

and assignments, self-study programs, rotational

assignments, the opportunity to instruct at System

schools, mentoring programs, and an annual con-

sumer compliance examiner forum where senior con-

sumer compliance examiners receive information on

emerging compliance issues and are able to share best

practices from across the System.

In 2014, the System continued to offer Rapid

Response sessions. Introduced in 2008, this platform

offers examiners one-hour teleconferences that

For more information, see www.federalreserve.gov/bankinforeg/

caletters/caltr1405.htm

For more information, see https://consumercomplianceoutlook

.org/outlook-live/2014/consumer-compliance-hot-topics/

84 101st Annual Report | 2014

explore emerging issues; provide urgent training to

address the implementation of new laws, regulations,

or supervisory guidance; and highlight case studies.

Seven consumer compliance Rapid Response sessions

were designed, developed, and presented to System

staff during 2014. The sessions covered a broad

range of topics including social media, flood insur-

ance violations, and vendor management

considerations.

Responding to Consumer Complaints

and Inquiries

The Federal Reserve investigates complaints against

state member banks and selected nonbank subsidiar-

ies of BHCs (Federal Reserve regulated entities), and

forwards complaints against other creditors and busi-

nesses to the appropriate enforcement agency. Each

Reserve Bank investigates complaints against Federal

Reserve regulated entities in its District. The Federal

Reserve also responds to consumer inquiries on a

broad range of banking topics, including consumer

protection questions.

In late 2007, the Federal Reserve established Federal

Reserve Consumer Help (FRCH) to centralize the

intake of consumer complaints and inquiries. In

2014, FRCH processed 32,339 cases. Of these cases,

more than half (19,179) were inquiries and the

remainder (13,160) were complaints, with most cases

received directly from consumers. Of the 13,160 com-

plaints, FRCH referred 76 percent to other federal

and state banking agencies in 2014. Approximately

5 percent of cases were referred to the Federal

Reserve from other agencies.

While consumers can contact FRCH by telephone,

fax, mail, e-mail, or online, most FRCH consumer

contacts occurred by telephone (59 percent). Thirty-

seven percent (12,118) of complaint and inquiry sub-

missions were made electronically (via e-mail, online

submissions, and fax), and the online form page

received approximately 59,174 visits during the year.

Complaint Referrals

In 2014, the Federal Reserve forwarded 9,992 com-

plaints against other banks and creditors to the

appropriate regulatory agencies and government

offices for investigation. To minimize the time

required to re-route complaints to these agencies,

referrals were transmitted electronically.

The Federal Reserve forwarded 11 complaints to the

Department of Housing and Urban Development

(HUD) that alleged violations of the Fair Housing

Act.

The Federal Reserve’s investigation of these

complaints revealed one instance of illegal credit

discrimination.

Consumer Inquiries

The Federal Reserve received over 19,000 consumer

inquiries in 2014, covering a wide range of topics.

Consumers were typically directed to other resources,

including other federal agencies or written materials,

to address their inquiries.

Consumer Complaints

Complaints against Federal Reserve regulated entities

totaled 3,159 in 2014. Approximately 42 percent

(1,334) of these complaints were received by tele-

phone, with 94 percent (1,254) of those requiring

additional information from consumers to be pro-

vided in writing to enable investigation. Approxi-

mately six percent of the total complaints received in

2014 were still under investigation as of Decem-

ber 2014. Of the remaining complaints (1,412),

67 percent (1,215) involved unregulated practices and

33 percent (610) involved regulated practices. (

Table 1

shows the breakdown of complaints about regulated

A memorandum of understanding between HUD and the fed-

eral bank regulatory agencies requires that complaints alleging a

violation of the Fair Housing Act be forwarded to HUD.

Table 1. Complaints against state member banks and

selected nonbank subsidiaries of bank holding companies

about regulated practices, by regulation/act, 2014

Regulation/act Number

Regulation AA (Unfair or Deceptive Acts or Practices) 5

Regulation B (Equal Credit Opportunity) 25

Regulation BB (Community Reinvestment) 2

Regulation CC (Expedited Funds Availability) 71

Regulation D (Reserve Requirements) 4

Regulation DD (Truth in Savings) 50

Regulation E (Electronic Funds Transfers) 51

Regulation H (National Flood Insurance Act/Insurance Sales) 9

Regulation M (Consumer Leasing Act) 1

Regulation P (Privacy of Consumer Financial Information) 18

Regulation V (Fair and Accurate Credit Transactions) 18

Regulation Z (Truth in Lending) 86

Garnishment Rule 1

Fair Credit Reporting Act 158

Fair Debt Collection Practices Act 54

Fair Housing Act 18

Homeowners Protection Act 5

Real Estate Settlement Procedures Act 28

Servicemembers Civil Relief Act 6

Total 610

Consumer and Community Affairs 85

practices by regulation or act; table 2 shows com-

plaints by product type.)

Complaints about Regulated Practices

The majority of regulated practices complaints con-

cerned checking accounts (21 percent), real estate

(17 percent), and credit cards (36 percent).

The

most common checking account complaints related

to funds availability not as expected (34 percent),

insuff icient funds/overdraft charges and procedures

(19 percent), and alleged forgery/fraud/

embezzlement/theft (9 percent). The most common

real estate complaints related to debt collection/

foreclosure concerns (14 percent); escrow problems

(12 percent); and disputed rates, terms, and fees

(8 percent). The most common credit card com-

plaints related to inaccurate credit reporting (38 per-

cent), bank debt-collection tactics (18 percent), bill-

ing error resolutions (8 percent), and payment errors/

delays (7 percent).

Twenty-six regulated practices complaints alleging

discrimination on the basis of prohibited borrower

traits or rights were received in 2014.

Nineteen dis-

crimination complaints were related to the race,

color, national origin, or ethnicity of the applicant or

borrower. Seven discrimination complaints were

related to either the age, handicap, familial status, or

religion of the applicant or borrower. Of the com-

plaints alleging discrimination based on a prohibited

basis received in 2014, there were no violations.

In 86 percent of complaints against Federal Reserve

regulated entities received in 2014, staff analysis

revealed that institutions correctly handled the situa-

tion. Of the remaining 14 percent of investigated

complaints, 4 percent were deemed violations of law;

4 percent were identified errors, which were corrected

by the bank; and the remainder included matters

involving litigation or factual disputes, withdrawn

complaints, internally referred complaints, or infor-

mation was provided to the consumer.

Complaints about Unregulated Practices

The Board continued to monitor complaints about

banking practices not subject to existing regulations.

In 2014, the Board received 1,215 complaints against

Federal Reserve regulated entities that involved these

unregulated practices.

The majority of the com-

plaints were related to electronic transactions/prepaid

products (30 percent), credit cards (20 percent),

checking account activity (13 percent), real estate

products (13 percent), and commercial loans/leases

(6 percent).

Consumer Laws and Regulations

Throughout 2014, DCCA continued to administer

the Board’s regulatory responsibilities with respect to

certain entities and specific statutory provisions of

the consumer financial services and fair lending laws.

Real estate loans include adjustable-rate mortgages, residential

construction loans, open-end home equity lines of credit, home

improvement loans, home purchase loans, home refinance/

closed-end loans, and reverse mortgages.

This includes alleged discrimination on the basis of race, color,

religion, national origin, sex, marital status, age, applicant

income derived from public assistance programs, or applicant

reliance on provisions of the Consumer Credit Protection Act.

Examples of unregulated practices include (but are not limited

to) customer service issues; allegations of forgery, embezzle-

ment, or theft; policy or procedure concerns; issues with account

opening and closing; and contractual issues that are not covered

under existing federal banking regulations.

Table 2. Complaints against state member banks and selected nonbank subsidiaries of bank holding companies about

regulated practices, by product type, 2014

Subject of complaint/product type

All complaints Complaints involving violations

Number Percent Number Percent

Total 610 100 22 4

Discrimination alleged

Real estate loans 22 3.6 0 0

Credit cards 2 0.4 0 0

Other loans 2 0.4 0 0

Nondiscrimination complaints

Checking accounts 128 20.9 7 1.3

Real estate loans 83 13.6 8 1.4

Credit cards 216 35.4 0 0

Other 157 25.7 7 1.3

86 101st Annual Report | 2014

This includes drafting regulations and issuing inter-

pretations and compliance guidance for the industry

and the Reserve Banks.

Proposed Flood Insurance Rule

In October, the Board, along with the Farm Credit

Administration, the FDIC, the NCUA, and the OCC

jointly issued a proposed rule to amend regulations

pertaining to loans secured by residential improved

real estate or mobile homes located in special flood

hazard areas.

The proposed rule would implement

provisions of the Homeowner Flood Insurance

Affordability Act of 2014 (HFIAA) relating to

escrowing flood insurance payments and the exemp-

tion of certain detached structures from the manda-

tory flood insurance purchase requirement. The

HFIAA amends the escrow provisions of the Big-

gert-Waters Act.

In accordance with the HFIAA, the proposed rule

would require regulated lending institutions to

escrow flood insurance premiums and fees for loans

made, increased, extended, or renewed on or after

January 1, 2016, unless the regulated lending institu-

tion or a loan qualifies for a statutory exception. In

addition, for outstanding residential loans made

before that date, the proposed rule would require

institutions to provide borrowers the option to

escrow flood insurance premiums and fees. To facili-

tate compliance, the agencies’ proposal includes new

and revised sample notice forms and clauses concern-

ing the escrow requirement and the option to escrow.

Consistent with the HFIAA, the proposed rule

would eliminate the legal requirement to purchase

flood insurance for a structure that is a part of a resi-

dential property located in a special flood hazard

area if that structure is detached from the primary

residential structure and does not also serve as a resi-

dence. Under the HFIAA, however, lenders may nev-

ertheless require the purchase of flood insurance for

such structures to protect the value of the collateral

securing the loan.

In a separate rulemaking, the agencies will address

other provisions of the Biggert-Waters Act for which

the agencies have jurisdiction and that were not

amended by the HFIAA.

Repealing Rules Pursuant to

the Dodd-Frank Act

Under title X of the Dodd-Frank Act, rulemaking

authority for a number of consumer financial protec-

tion laws was transferred from the Board to the

CFPB, except with respect to certain motor vehicle

dealers. In May 2014, the Board repealed its Regula-

tion DD (Truth in Savings) and Regulation P (Pri-

vacy of Consumer Financial Information), which

were superseded by substantially identical rules

issued by the CFPB.

At the same time, the Board

issued final amendments to the Identity Theft Red

Flags rule in Regulation V (Fair Credit Reporting),

which require financial institutions and creditors to

implement identity theft prevention programs and

clarify that these provisions apply only to creditors

that regularly extend credit or obtain consumer

reports in the ordinary course of their business.

In August, the Board issued a proposal to repeal its

Regulation AA (Unfair or Deceptive Acts or Prac-

tices), which includes the Board’s “credit practices

rule” that prohibits banks from using certain rem-

edies to enforce consumer credit obligations and

from including these remedies in their consumer

credit contracts.

The Dodd-Frank Act repealed the

provision in the Federal Trade Commission Act that

authorized the Board to issue rules addressing unfair

or deceptive acts or practices by banks. Notwith-

standing the repeal of the Board’s rulemaking

authority, the Board continues to have enforcement

authority under the Federal Trade Commission Act

and the Dodd-Frank Act to prevent and remedy

unfair or deceptive acts or practices by the institu-

tions it supervises. Concurrent with the proposed

repeal of Regulation AA, the Board, the CFPB, the

FDIC, the NCUA, and the OCC issued interagency

guidance clarifying that the unfair or deceptive prac-

tices described in the former credit practices rules,

including those in Regulation AA, could violate the

statutory prohibitions against unfair or deceptive

practices, even in the absence of a specific regulation

governing the conduct.

For more information, see www.federalreserve.gov/newsevents/

press/bcreg/20141024a.htm

For more information, see www.federalreserve.gov/newsevents/

press/bcreg/20140522a.htm

The amendments to the Fair Credit Reporting Act were

intended to narrow the scope of the law so that it would not be

applied to professionals, such as doctors or lawyers, who some-

times allow consumers to delay payment.

For more information, see www.federalreserve.gov/newsevents/

press/bcreg/bcreg20140822a.htm

Consumer and Community Affairs 87

Consumer Research and

Emerging-Issues and Policy Analysis

Throughout 2014, DCCA analyzed emerging issues

in consumer financial services policies and practices

in order to understand their implications for the mar-

ket risk surveillance and supervisory policies that are

core to the Federal Reserve’s functions, as well as to

gain insight into consumer financial decisionmaking.

Researching Issues Affecting Consumers

and Communities

In 2014, DCCA explored various issues related to

consumers and communities through convening

experts, conducting original research, and fielding

new and ongoing surveys. The information gleaned

from these undertakings provided insights into the

factors affecting consumers and households.

Consumer Behavior Research Surveys

In order to better understand consumer decision-

making in the rapidly evolving f inancial services sec-

tor, DCCA periodically conducts Internet panel sur-

veys to gather data on consumers’ experiences and

perspectives on various issues of interest.

With respect to ongoing surveys, DCCA conducted

its annual survey of consumers’ use of, and opinions

about, mobile financial services. Since 2011, the sur-

vey has polled more than 2,200 individuals each year

to learn whether and how they use mobile devices for

banking and payments. The survey was also among

the first to integrate questions about using mobile

devices for shopping and comparing products along

with questions about using mobile devices for bank-

ing and payments.

The findings of these surveys, conducted in the win-

ter, are released each spring in the report Consumers

and Mobile Financial Services. Results from the sur-

vey conducted in November 2013 were published in

March 2014.

For the fourth survey, conducted in

December 2014, results will be published in

March 2015. Given the rapid pace of developments

in the mobile financial services market, DCCA plans

to conduct another survey of consumers’ use of

mobile financial services in the coming year and pro-

duce a corresponding report summarizing the survey

results.

In addition, results from DCCA’s newest survey in

the financial services area—the Survey of Household

Economics and Decisionmaking—were published in

the Report on the Economic Well-Being of U.S.

Households in 2013, released in August 2014. (See

box 1 for details.) DCCA launched the survey to bet-

ter understand consumer decisionmaking in the wake

of the Great Recession.

Survey of Experiences and Perspectives

of Young Workers

In 2013, the Community Development staff at the

Federal Reserve Board began exploring the experi-

ences and expectations of young Americans entering

the labor market. Staff reviewed existing research

and engaged external research and policy experts to

identify the potential economic implications of these

labor market trends on young workers. This initial

exploration raised several questions about the experi-

ences of young workers that were not fully explained

by existing data. In response, the Federal Reserve

conducted the Survey of Young Workers in Decem-

ber 2013 to develop a deeper understanding of the

forces at play. The online survey was intended to be

exploratory—ultimately confirming some insights

and highlighting areas worthy of additional study.

The survey was administered via an Internet panel.

The 2,097 survey respondents ranged in age from

18 to 30.

In the Shadow of the Great Recession: Experiences

and Perspectives of Young Workers was released in

November 2014, with preliminary findings high-

lighted at a conference co-sponsored by the Federal

Reserve Banks of Atlanta and Kansas City and Rut-

gers University’s John J. Heldrich Center for Work-

force Development.

The report summarizes insights

from the Survey of Young Workers and frames policy

and research issues for future consideration by the

Federal Reserve Board. One of the major findings

highlighted in the report is that many young adults

remain optimistic about their job future and that

respondents with higher levels of education and work

experience are more likely to be optimistic than

respondents who lack such skills and experiences. A

second finding is that young workers are responding

to the labor market’s increasing demand for postsec-

See Board of Governors of the Federal Reserve System (2014),

Consumers and Mobile Financial Services 2014 (Washington:

Board of Governors, March),

www.federalreserve.gov/

econresdata/consumers-and-mobile-financial-services-report-

201403.pdf

For more information on the event, see www.frbatlanta.org/

news/conferences/2014/141015-workforce-development.aspx

and

www.kc.frb.org/events/eventdetail.cfm?event=

7379EDCCC3274761D20CF8C1F7524B47

88 101st Annual Report | 2014

Box 1. Shedding Light on Household Finances: Survey of Household

Economics and Decisionmaking

DCCA has been exploring knowledge gaps about

consumer financial behavior, decisionmaking, and

experiences following the Great Recession. The

Survey of Household Economics and Decisionmak-

ing (SHED) focuses on issues not sufficiently under-

stood through external data and research or not

already explored through other Federal Reserve

resources, such as the Survey of Consumer

Finances. The SHED includes questions about

housing and living arrangements, credit access and

behavior, education and student debt, savings,

retirement, and medical expenses.

The results of the September 2013 SHED survey

are outlined in the Report on the Economic Well-

Being of U.S. Households in 2013, released in

July 2014.

A second round of the survey was con-

ducted in the fall of 2014, and a report on its find-

ings will be published in summer 2015.

Overall, the survey found that, as of Septem-

ber 2013, many households were faring well but that

sizable fractions of the population were displaying

some signs of financial stress:

Lingering effects of the recession: Thirty-

four percent of individuals reported that they were

worse off financially than they had been five years

earlier in 2008, and 34 percent said that they were

doing about the same. While over 60 percent of

respondents indicated that their families were either

“doing okay” or “living comfortably” financially, one-

fourth said that they were “just getting by” and

another 13 percent said they were struggling to

do so.

Credit availability: While 31 percent of survey

respondents had applied for some type of credit in

the prior 12 months, one-third of those who applied

for credit were turned down or given less credit than

they applied for. Moreover, 15 percent of those who

did not apply reported that they put off applying

because they thought they would be turned down.

Overall, 23 percent of respondents were either

denied credit, offered less credit than they

requested, or put off applying for fear of denial.

Housing and mortgages: Many renters expressed

an implied interest in homeownership, as the most

common reasons for renting rather than owning a

home were an inability to afford the down payment

(45 percent) and an inability to qualify for a mort-

gage (29 percent). Overall, confidence in mortgage

approval was mixed, with 53 percent of all respon-

dents—including homeowners—indicating they were

confident that they would be approved for a mort-

gage if they were to apply at the time of the survey.

In contrast, 29 percent said they were not confident

and 17 percent did not know whether they could

obtain approval.

Education debt: Twenty-four percent of the popula-

tion held education debt for themselves or a family

member, with 16 percent holding debt from their

own education. Some individuals struggle to service

this debt, with 18 percent of those with education

debt indicating that they were behind on payments

in some way, including 9 percent with loans in col-

lections. The rate of being behind or in collections

was far greater among those who failed to complete

the program for which they borrowed money, and

also varied by type of institution attended.

Emergency savings: Many respondents indicated a

lack of preparedness for financial emergencies.

When asked how they would pay for a theoretical

emergency expense of $400, less than half of

respondents said that they would completely pay it

using cash or a credit card that they pay in full,

while 19 percent indicated they could not pay the

expense and 33 percent would pay the expense by

borrowing or selling something. Over two-fifths of

respondents are ill-prepared for a loss of their main

source of income and could not cover expenses for

three months even by borrowing money, using sav-

ings, selling assets, or borrowing from friends or

family.

Retirement planning: The survey results suggest

that many individuals are not adequately prepared

for retirement. Thirty-one percent of non-retired

respondents reported having no retirement savings

or pension, including 19 percent of those ages 55 to

64. Retirement plans for many individuals at or near

retirement were also altered by the Great Reces-

sion. Two-fifths of those over age 45 who had not

yet retired said that they pushed back the planned

date of retirement because of the recession, and

15 percent of those who had retired since 2008

reported that they retired earlier than planned due to

the recession.

For the press release and publication, see www.federalreserve

.gov/newsevents/press/other/20140807a.htm.

Consumer and Community Affairs 89

ondary credentials and degrees. A third finding is

that intangibles still play an important role and that

finding a job is still heavily based on personal con-

nections. Lastly, the survey found that young workers

value job stability, and when given the choice, respon-

dents generally preferred steady employment (67 per-

cent) to higher pay (30 percent).

Emerging-Issues Analysis

The Policy Analysis function of DCCA provides key

insights, information, and analysis on emerging

financial services issues that affect the well-being of

consumers and communities. To this end, Policy

Analysis staff follow, analyze, and anticipate trends;

lead Division-wide issues working groups; and orga-

nize expert roundtables to identify emerging risks

and inform policy recommendations.

In 2014, the Policy Analysis team contributed analy-

ses on a broad range of policy issues—from recent

trends in auto lending, to the impact on consumers

of student loan debt, to the implications of mobile

banking, to existing and emerging credit products for

small businesses, and to challenges facing certain seg-

ments of consumers. New mortgage rules took effect

at the beginning of the year and Policy staff, together

with colleagues at the Board and in the Federal

Reserve Banks, continued to closely monitor the

availability of mortgage credit and the impact on

local housing markets, neighborhoods, and potential

homebuyers.

Impact of Resets on Home Equity Lines of

Credit and Mortgage Interest Rates

In 2014, the first wave of interest-rate resets occurred

on HELOCs, interest-only (I-O) loans, and loans in

the Home Affordable Modification Program

(HAMP) program. These resets could result in pay-

ment shock for millions of homeowners, depending

on their FICO scores and other debts.

About one-quarter, or 2.5 million, of the more than

10 million HELOCs outstanding are expected to

reach their end-of-draw periods and convert to amor-

tizing loans by the end of 2017, with the average pay-

ment estimated to rise by $250 per month. In

response, some large banks have implemented

HELOC-assistance programs to borrowers in need of

flexible payment arrangements.

Also, many of the I-O mortgages, which were in wide

use during the height of the lending bubble in 2007

and put borrowers into homes with artificially low

mortgage payments for an initial period, are begin-

ning to reset to payments that reflect full amortiza-

tion. Payment increases, in some cases, may be

significant.

Meanwhile, the first loan modifications made under

the government’s HAMP program are reaching their

five-year mark, after which interest rates will increase

up to 1 percent per year until they adjust to the mar-

ket rate at the time of their modification. HAMP

modifications will continue to enter this multiyear

reset process with completion expected by 2021.

The Policy Analysis team participated in an inter-

agency regulatory conference on mortgage resets

with researchers and examiners working on the topic.

Assistance also was provided for interagency guid-

ance on mortgage resets to ensure that, in addition to

bank safety and soundness considerations, consum-

ers will be provided with adequate notice to prepare

for the increases and that concerns on the part of

affected borrowers will be addressed.

Trends in Auto Lending

The Policy team continued to monitor developments

in auto lending. While Federal Reserve research

shows a solid recovery of the auto market post-crisis

and growth in auto loan originations, concerns have

been raised that increased lending to below-prime

borrowers, high-cost loans, and longer loan terms

could result in financial hardship for households

struggling with living expenses. In August, Policy

Analysis staff held a forum for Federal Reserve

System staff to discuss their research to assess cur-

rent auto market conditions and loan performance

data, with a particular focus on the subprime sector,

and explore any potential risk areas and consumer

harms. Staff also engaged with industry representa-

tives and consumer groups who also attended to

share their perspectives about certain auto lending

practices and the implications for consumers. The

dialogue provided an opportunity for staff and exter-

nal experts to exchange views about the future state

of auto financing and to identify areas where addi-

tional data and analysis would be useful to better

monitor market and lending conditions affecting the

availability of and access to affordable auto loan

products.

For more information, see www.federalreserve.gov/bankinforeg/

srletters/sr1405.htm

90 101st Annual Report | 2014

The Evolving Small Business–Bank

Relationship

The Federal Reserve System has typically concen-

trated its small business–related activities around the

study of credit conditions and the impact of a strong

business climate on community and economic devel-

opment. Less understood is the overall impact of a

changing financial landscape on the small business

customer and existing banking business models.

In the past, small business banking has been consid-

ered largely “relationship banking.” Recent trends,

however, suggest that small businesses engage in a

more complex web of relationships among compet-

ing financial service providers. A vast array of non-

bank service providers has cropped up to help small

businesses manage various aspects of their banking

and payments processes, including deposits, debit

and credit card payments, Treasury services, remote

deposit, payroll, automated clearinghouse (ACH),

and wire services. Likewise, online alternative lenders

have developed innovative technologies to underwrite

and originate loans and now offer short-term loan

products aimed at filling small businesses’ small-

dollar needs. Among these new players are peer-to-

peer lenders, direct loan providers, and payment pro-

cessing firms making forays into cash-advance lend-

ing. Consequently, competition and new technologies

are altering the conventional concept of small busi-

ness relationship banking.

The Policy team convened a working session for staff

from throughout the Federal Reserve System—in-

cluding the community development, research,

regional economics, consumer compliance, and

operations functions—who are concerned with small

business issues. Internal and external experts pre-

sented research on current trends in traditional and

online small business banking. The session was aimed

at exploring how small business–bank relationships

are developed and maintained in an environment of

technological change, the growth of nonbank service

providers, and the resulting impact on traditional

bank business models and small businesses.

To supplement small business research being con-

ducted throughout the Federal Reserve System, the

Policy team commissioned two research studies from

outside organizations. One, a survey of 60 commu-

nity bank CEOs, found that banks recognize that

their small business customers are savvier today than

in the past when it comes to assessing their banking

needs and options. The survey also found that banks

appear to have the desire and liquidity to lend, but

are becoming more conservative in their underwriting

for small business borrowers. The second study, an

online focus group of 22 small business borrowers,

examined small businesses’ awareness, perceptions,

and understanding of short-term, small-dollar online

loan products. The study revealed that small busi-

nesses find it difficult to compare and evaluate the

costs and benefits of various online small-dollar

products. Potential borrowers also expressed con-

cerns about safeguards to protect their personal and

business information were they to borrow funds from

these online sources.

Community Development

The Federal Reserve System’s Community Develop-

ment function promotes economic growth and finan-

cial stability for LMI communities and individuals

through a range of activities: convening stakeholders,

conducting and sharing research, and identifying

emerging issues (see

box 2 for more information). As

a decentralized function, the Community Affairs

Officers (CAOs) at each of the 12 Reserve Banks

design activities to respond to the specific needs of

the communities they serve, with oversight from

Board staff to promote and coordinate Systemwide

priorities.

Exploring New Sources of

Community Development Finance

One of the responsibilities of the Federal Reserve’s

Community Development function is to research the

sources of community development finance for

underserved communities and work with stakehold-

ers to improve the supply and delivery of these funds.

Historically, the Federal Reserve’s interest in these

funding sources has mainly included the more tradi-

tional sources, such as government funding, founda-

tions, Community Development Financial Institu-

tions, and CRA-motivated bank investments. All of

these remain critical sources of funding, but many of

these have also been shrinking in recent years. There-

fore, the Board’s Community Development team has

begun to investigate how new and innovative sources

of funding could be used to finance community

development and small business. A key part of this

expansion is technology, which is changing fundrais-

ing and investment and has the potential to stream-

line and scale community development transactions.

In March 2014, the Board’s Community Develop-

ment team hosted a small group of community devel-

Consumer and Community Affairs 91

opment and technology thought leaders for a discus-

sion on the challenges and opportunities presented

by crowdfunding investment as a significant new

source of capital for the community development

industry. The event was also live-streamed on the

Board’s website and set the groundwork for these two

otherwise divergent fields to facilitate a functional,

fair, and prosperous crowdfunding market for com-

munity development.

In September 2014, the Board hosted a meeting

entitled “Family Philanthropy and Impact Invest-

ing,” and brought together staff and trustees from

family foundations, family offices, advisors, and

other thought leaders to discuss the increasing

demand for family foundations to engage in impact

investing.

In October 2014, the Board hosted a targeted meet-

ing for online community development platforms.

The meeting brought together practitioners that were

either currently operating, or seriously investing in

the development of, online platforms that facilitate

community development transactions. The meeting

was structured as a peer-to-peer interaction and

focused on identifying the current landscape of com-

munity development online platforms, common bar-

riers and challenges, best practices, and opportunities

for collaboration.

These three meetings, in addition to dozens of other

conversations and meetings, have greatly expanded

the Board’s knowledge of potential new sources of

community development finance, and helped to con-

nect the various stakeholders in this field.

Expanding Access to

Information on System

Community Development Activities

In 2012, the Federal Reserve’s Community Develop-

ment function conducted an environmental scan to

assess community development needs around the

country. One of the key findings from this process

was that Community Development staff could

improve their efforts to share the wide array of

resources with the public and System colleagues alike

in a more systematic and user-friendly way. As a

result, the FedCommunities.org web portal was cre-

ated to improve the awareness of, and access to, Fed-

eral Reserve community development resources by

providing users with a single, web-based entry point.

Resources are organized according to the System’s

strategic focus areas supporting people, place, the

policy and practice of community development, and

small business.

Launched in June 2014, FedCommunities.org func-

tions as a referral site, in that it aggregates informa-

tion on relevant, timely community development

resources from all 12 Reserve Banks and the Board of

Governors in a centralized spot. Users are then redi-

rected to specific Reserve Bank websites for access to

the materials themselves, and for additional content.

In its first quarter of operation, FedCommunities.org

drew 12,840 page views for the approximately 350

resources it hosted from across the Federal Reserve

System. The site offers four key features:

To access the site, see www.fedcommunities.org.

Box 2. How Does the Fed Promote Effective Community Development?

The Federal Reserve understands that stable com-

munities promote stable regions and a more robust

economy overall. Staff in the Community Develop-

ment function at the Board and all 12 Reserve Banks

engage in applied research, public programs, out-

reach, and technical assistance in order to help pro-

mote economic growth and financial stability in com-

munities across the country, especially low- and

moderate-income areas.

The System’s commitment to community develop-

ment is captured in the Community Development

Perspectives report, which represents its various

points of engagement in this work around the coun-

try. Released in conjunction with the FedCommuni-

ties.org site launch, this report includes brief summa-

ries of Community Development’s work in its strate-

gic focal points of people, place, the policy and

practice of community development, and small busi-

ness. Within each of these focus areas, the report

includes background information that helps to pro-

vide context for this work; a sampling of key

research, outreach programs, and other initiatives;

and some ideas on future challenges, needs, and

opportunities. Read the interactive report at

www.fedcommunities.org.

92 101st Annual Report | 2014

•

Resources are easy to locate and are organized

by two key pieces of information: topic/community

development content and type of resource (e.g.,

national and local data, speeches, publications,

etc.).

•

A robust search feature helps users locate

resources, either by specific criteria or general inter-

est categories.

•

Users can sign up to be notified of new content

according to preference criteria that they select.

•

Content is populated regularly to keep the site

fresh and current.

Consumer and Community Affairs 93

Federal Reserve Banks

The Federal Reserve Banks provide payment services

to depository and certain other institutions, distribute

the nation’s currency and coin to depository institu-

tions, and serve as fiscal agents and depositories for

the U.S. government and other entities. The Reserve

Banks also contribute to setting national monetary

policy and supervision of banks and other financial

entities operating in the United States (discussed in

sections 2 through 4 of this annual report).

Federal Reserve Priced Services

Reserve Banks provide a range of payment and

related services to depository and certain other insti-

tutions; these “priced services” include collecting

checks, operating an automated clearinghouse

(ACH) service, transferring funds and securities, and

providing a multilateral settlement service.

The Reserve Banks, working with the financial ser-

vices industry, have made substantial progress in their

effort to migrate to a more efficient electronic pay-

ment system by expanding the use of ACH payments

and by converting from a paper-based check-clearing

process to an electronic one. Over the past several

years, the Reserve Banks have capitalized on efficien-

cies gained from increased electronic processing; the

Reserve Banks offer a bundle of all-electronic pay-

ment services and offer information and risk-

management services, which help depository institu-

tions manage effectively both their payment opera-

tions and associated operational and credit risk. The

Reserve Banks have also been engaged in a number

of multiyear technology initiatives that will modern-

ize their priced-services processing platforms.

In 2014, the Reserve Banks continued efforts to

migrate the FedACH, Fedwire Funds, and Fedwire

Securities services from a mainframe system to a dis-

tributed computing environment. A significant mile-

stone was reached by successfully migrating the Fed-

wire Funds Settlement application and the Reserve

Banks’ accounting system to a distributed environ-

ment. The Reserve Banks continued to make progress

on the migration of the Fedwire Securities applica-

tions. However, after conducting an assessment of

the viability and cost-effectiveness of the FedACH

program, the Reserve Banks suspended the initiative

and began to investigate the use of other technology

solutions.

In October 2014, the Federal Reserve Board

announced final revisions to part I of the Federal

Reserve Policy on Payment System Risk (PSR policy)

that are based on and generally consistent with the

international risk-management standards in the

April 2012 Principles for Financial Market Infrastruc-

tures developed jointly by the Committee on Payment

and Settlement Systems and the International Orga-

nization of Securities Commissions.

The revised

policy retains the expectation that the Fedwire Funds

Service and the Fedwire Securities Service will meet

or exceed the applicable risk-management standards

in the policy. The final policy became effective on

December 31, 2014.

In December 2014, the Federal Reserve Board

adopted changes to part II of the PSR policy and

companion amendments to Regulation J (Collection

of Checks and Other Items by Federal Reserve

Banks and Funds Transfers through Fedwire) that

were designed to enhance the efficiency of the pay-

ment system. The changes are largely related to the

posting rules for ACH and commercial check trans-

actions.

Under the current posting rules for commercial and

government ACH transactions, ACH debit transac-

tions post at 11:00 a.m., and ACH credit transactions

The ACH enables depository institutions and their customers to

process large volumes of payments effectively through electronic

batch processes.

Effective September 1, 2014, the Committee on Payment and

Settlement Systems changed its name to Committee on Pay-

ments and Market Infrastructures.

12 CFR part 210.

post at 8:30 a.m.

The Board changed the posting of

ACH debit transactions to 8:30 a.m. to align with the

posting time of ACH credit transactions.

In addition, the Board’s current posting rules for

commercial check transactions reflect a presumption

that banks generally handle checks in paper form and

do not reflect banks’ widespread use of electronic

check-processing methods. To reflect the current elec-

tronic check-processing environment, the Board

changed the posting time for receiving most credits

for deposits and debits for presentments to 8:30 a.m.

and established two other posting times at 1:00 p.m.

and 5:30 p.m.

The amendments to Regulation J permit the Reserve

Banks to obtain settlement from paying banks as

early as 8:30 a.m. for checks that the Reserve Banks

present. The amendments also permit the Reserve

Banks to require paying banks that receive present-

ment of checks from the Reserve Banks to make the

proceeds of settlement for those checks available to

the Reserve Banks as soon as 30 minutes after receipt

of the checks. These changes to the PSR policy and

Regulation J become effective July 23, 2015.

Recovery of Direct and Indirect Costs

The Monetary Control Act of 1980 requires that the

Federal Reserve establish fees for priced services to

recover, over the long run, all direct and indirect costs

actually incurred as well as the imputed costs that

would have been incurred—including financing costs,

taxes, and certain other expenses—and the return on

equity (profit) that would have been earned if a pri-

vate business firm had provided the services.

The

imputed costs and imputed profit are collectively

referred to as the private-sector adjustment factor

(PSAF). From 2005 through 2014, the Reserve Banks

recovered 102.9 percent of the total priced services

costs, including the PSAF (see table 1).

All times are eastern time unless otherwise specified.

Pub. Law No. 96-221, March 31, 1980. Financial data reported

throughout this section—including revenue, other income, costs,

income before taxes, and net income—will reference the “

Pro

Forma Financial Statements for Federal Reserve Priced Ser-

vices

” at the end of this section.

According to the Accounting Standards Codification (ASC)

Topic 715 (ASC 715), Compensation–Retirement Benefits, the

Reserve Banks recognized a $549.7 million reduction in equity

related to the priced services’ benefit plans through 2014.

Including this reduction in equity, which represents a decline in

economic value, results in cost recovery of 95.1 percent for the

10-year period. For details on how implementing ASC 715

affected the pro forma financial statements, refer to note 3 to the

pro forma f inancial statements at the end of this section.

Table 1. Priced services cost recovery, 2005–14

Millions of dollars, except as noted

Year Revenue from services

Operating expenses and

imputed costs

Targeted return on equity

Total costs Cost recovery (percent)

2005 993.8 834.4 103.0 937.4 106.0

2006 1,029.7 874.8 72.0 946.8 108.8

2007 1,012.3 912.9 80.4 993.3 101.9

2008 873.8 820.4 66.5 886.9 98.5

2009 675.4 707.5 19.9 727.5 92.8

2010 574.7 532.8 13.1 545.9 105.3

2011 478.6 444.4 16.8 461.2 103.8

2012 449.8 423.0 8.9 432.0 104.1

2013 441.3 409.3 4.2 413.5 106.7

2014 433.1 418.7 5.5 424.1 102.1

2005–14 6,962.4 6,378.3 390.3 6,768.6 102.9

Note: Here and elsewhere in this section, components may not sum to totals or yield percentages shown because of rounding.

For the 10-year period, includes revenue from services of $6,491.6 million and other income and expense (net) of $470.8 million.

For the 10-year period, includes operating expenses of $6,079.4 million, imputed costs of $34.5 million, and imputed income taxes of $264.5 million.

From 2009 to 2012, the PSAF was adjusted to reflect the actual clearing balance levels maintained; previously, the PSAF had been calculated based on a projection of

clearing balance levels.

Revenue from services divided by total costs. For the 10-year period, cost recovery is 95.1 percent, including the effect of accumulated other comprehensive income (AOCI)

reported by the priced services under ASC 715. For details on changes to the estimation of priced services accumulated other comprehensive income and their effect on the

pro forma financial statements, refer to note 3 to the “

Pro Forma Financial Statements for Federal Reserve Priced Services” at the end of this section.

96 101st Annual Report | 2014

In 2014, Reserve Banks recovered 102.1 percent of

the total priced services costs, including the PSAF.

The Reserve Banks’ operating expenses and imputed

costs totaled $418.7 million. Revenue from opera-

tions totaled $433.1 million, resulting in net income

from priced services of $14.5 million. Although the

check service, the Fedwire Funds and National

Settlement Services, and the Fedwire Securities Ser-

vice achieved full cost recovery, the FedACH Service

recovered 86.7 percent of its costs because of a

$31.6 million charge associated with the decision to

suspend its investment in a multiyear technology ini-

tiative to modernize its processing platform. Greater-

than-expected check volume processed by the

Reserve Banks was the single most significant factor

influencing priced services cost recovery.

Commercial Check-Collection Service

In 2014, Reserve Banks recovered 115.6 percent of

the total costs of their commercial check-collection

service, including the related PSAF. Revenue from

operations totaled $174.7 million, resulting in net

income of $25.4 million. This revenue decreased

$24.1 million from 2013. The Reserve Banks’ operat-

ing expenses and imputed costs totaled $149.3 mil-

lion. Reserve Banks handled 5.7 billion checks in

2014, a decrease of 4.1 percent from 2013 (see

table 2). The decline in Reserve Bank check volume,

attributable to the decline in the number of checks

written generally, was not as great as anticipated and

led to the resulting net income. The average daily

value of checks collected by the Reserve Banks in

2014 was approximately $32.3 billion, an increase of

1.9 percent from the previous year.

Commercial Automated

Clearinghouse Service

The Reserve Banks’ long-run cost recovery average

from 2005 to 2014 for FedACH was 100.0 percent. In

2014, the Reserve Banks recovered 86.7 percent of

the total costs of their commercial ACH services,

including the related PSAF. Revenue from ACH

operations totaled $124.4 million, an increase of

$5.5 million from 2013. Reserve Bank operating

expenses and imputed costs totaled $141.4 million,

resulting in a net loss of $17.0 million. In 2014, the

Reserve Banks processed 11.6 billion commercial

ACH transactions, an increase of 4.3 percent from

2013. The average daily value of FedACH transfers

in 2014 was approximately $79.2 billion, an increase

of 1.0 percent from the previous year.

Fedwire Funds and National

Settlement Services

In 2014, Reserve Banks recovered 103.2 percent of

the costs of their Fedwire Funds and National Settle-

ment Services, including the PSAF. Reserve Bank

operating expenses and imputed costs for these

operations totaled $105.2 million in 2014. Revenue

from these services totaled $110.1 million, resulting

in a net income of $4.8 million.

Fedwire Funds Service

The Fedwire Funds Service allows its participants to

use their balances at Reserve Banks to transfer funds

to other participants in the service. In 2014, the num-

ber of Fedwire funds transfers originated by deposi-

tory institutions increased 0.7 percent from 2013, to

approximately 138 million. The average daily value of

Fedwire funds transfers in 2014 was $3.5 trillion, an

increase of 24 percent from the previous year.

Total cost is the sum of operating expenses, imputed costs

(income taxes, interest on debt, interest on float, and sales

taxes), and the targeted return on equity.

Table 2. Activity in Federal Reserve priced services, 2012–14

Thousands of items

Service 2014 2013 2012

Percent change

2013 to 2014 2012 to 2013

Commercial check 5,741,527 5,988,302 6,622,265 -4.1 -9.6

Commercial ACH 11,620,376 11,142,821 10,664,613 4.3 4.5

Fedwire funds transfer 138,133 137,219 134,409 0.7 2.1

National settlement 597 661 663 -9.7 -0.3

Fedwire securities 4578 6,535 6,441 -30.0 1.5

Note: Activity in commercial check is the total number of commercial checks collected, including processed and fine-sort items; in commercial ACH, the total number of

commercial items processed; in Fedwire funds transfer and securities transfer, the number of transactions originated online and offline; and in national settlement, the number

of settlement entries processed.

Federal Reserve Banks 97

National Settlement Service

The National Settlement Service is a multilateral

settlement system that allows participants in private-

sector clearing arrangements to settle transactions

using Federal Reserve balances. In 2014, the service

processed settlement files for 17 local and national

private-sector arrangements. The Reserve Banks pro-

cessed 9,896 files that contained 569,502 settlement

entries for these arrangements in 2014. Activity in

2014 represents a decrease from the 661,466 settle-

ment entries processed in 2013.

Fedwire Securities Service

The Fedwire Securities Service allows its participants

to transfer electronically to other service participants

certain securities issued by the U.S. Treasury Depart-

ment, federal government agencies, government-

sponsored enterprises (GSEs), and certain interna-

tional organizations.

In 2014, the number of non-

Treasury securities transfers processed via the service

decreased 30.0 percent from 2013, to approximately

9.4 million. The average daily value of Fedwire Secu-

rities transfers in 2014 was $1.1 trillion, a decrease of

3 percent from the previous year.

The Reserve Banks recovered 104.1 percent of the

total costs of the priced-service component of their

Fedwire Securities Service, including the PSAF. The

Reserve Banks’ operating expenses and imputed

costs for providing this service totaled $22.7 million

in 2014. Revenue from the service totaled $24.0 mil-

lion, resulting in a net income of $1.2 million.

Float

In 2014, the Reserve Banks had daily average credit

float of $590.8 million, compared with daily average

credit float of $630.2 million in 2013.

Currency and Coin

The Board is the issuing authority for the nation’s

currency (in the form of Federal Reserve notes). In

2014, the Board paid the U.S. Treasury Department’s

Bureau of Engraving and Printing (BEP) $656.8 mil-

lion for costs associated with the production of

6.9 billion Federal Reserve notes. The Reserve Banks

distribute and receive currency and coin through

depository institutions in response to public demand.

Together, the Board and Reserve Banks work to

maintain the integrity of and confidence in Federal

Reserve notes.

In 2014, the Reserve Banks distributed 37.6 billion

Federal Reserve notes into circulation, a 0.6 percent

increase from 2013, and received 35.7 billion Federal

Reserve notes from circulation, a 0.2 percent decrease

from 2013. The value of Federal Reserve notes in cir-

culation increased nearly 8.4 percent in 2014, to

$1,298.7 billion at year-end, largely because of inter-

national demand for $100 notes. In 2014, the Reserve

Banks also distributed 69.4 billion coins into circula-

tion, a 1.7 percent increase from 2013, and received

55.4 billion coins from circulation, a 2.5 percent

decrease from 2013.

Redesigned $100 Note

The Federal Reserve began supplying financial insti-

tutions with a redesigned $100 note on October 8,

2013. The Federal Reserve, U.S. Department of the

Treasury, the BEP, and the U.S. Secret Service part-

ner to redesign Federal Reserve notes to stay ahead

of counterfeiting threats. During 2014, the Federal

Reserve Banks distributed 3.6 billion redesigned $100

notes and replaced nearly 30 percent of all $100 notes

in circulation with the redesigned $100 note.

Improvements to Efficiency and

Risk Management

Advances in currency-processing equipment and sen-

sor technology increased productivity and improved

note authentication and fitness measurement,

thereby reducing the premature destruction of fit

currency while maintaining the quality and integrity

of currency in circulation. In 2014, Reserve Banks

installed a new type of fitness sensor and began

installing a new type of authentication sensor. Addi-

tionally, the Reserve Banks continue working with

equipment manufacturers to explore the next genera-

tion of equipment to process the high volume of

The expenses, revenues, volumes, and fees reported here are for

transfers of securities issued by federal government agencies,

government-sponsored enterprises, and certain international

organizations. Reserve Banks provide Treasury securities ser-

vices in their role as the U.S. Treasury’s fiscal agent. These ser-

vices are not considered priced services. For details, see “

Treas-

ury Securities Services

” later in this section.

Credit float occurs when the Reserve Banks present checks and

other items to the paying bank prior to providing credit to the

depositing bank (debit float occurs when the Reserve Banks

credit the depositing bank before presenting checks and other

items to the paying bank).

98 101st Annual Report | 2014

notes received annually for authentication and fitness

sorting.

During 2014, some Reserve Banks began implement-

ing new processes designed to increase productivity

and enhance risk management, which all Reserve

Banks will implement in 2015.

Other Improvements and Efforts

Reserve Banks continue to develop a new cash auto-

mation platform that will replace legacy software

applications, automate business concepts and pro-

cesses, and employ technologies to meet the cash

business’s current and future needs more cost effec-

tively. The new platform will also facilitate business

continuity and contingency planning and enhance

the support provided to Reserve Bank customers. In

2014, the Reserve Banks continued application devel-

opment and testing efforts for the new automation

platform, which is scheduled to be deployed to all

cash offices by year-end 2017.

The Board and the BEP continued implementing

components of a new quality system for the BEP

throughout 2014. The BEP installed and began using

sorting equipment that culls good notes from rejected

half sheets. This process, known as “single note

inspection,” should reduce spoilage rates and print-

ing costs.

Fiscal Agency and Government

Depository Services

As fiscal agents and depositories for the federal gov-

ernment, the Reserve Banks auction Treasury securi-

ties, process electronic and check payments for Treas-

ury, collect funds owed to the federal government,

maintain Treasury’s bank account, and develop,

operate, and maintain a number of automated sys-

tems to support Treasury’s mission. The Reserve

Banks also provide certain fiscal agency and deposi-

tory services to other entities; these services are pri-

marily related to book-entry securities. Treasury and

other entities fully reimburse the Reserve Banks for

the expense of providing fiscal agency and depository

services.

In 2014, fiscal agency expenses amounted to

$569.6 million, a 7.5 percent increase from 2013 (see

table 3). Expenses increased as a result of requests

from Treasury’s Bureau of the Fiscal Service (Fiscal

Service). Support for Treasury programs accounted

for 93.9 percent of expenses, and support for other

entities accounted for 6.1 percent.

Table 3. Expenses of the Federal Reserve Banks for fiscal agency and depository services, 2012–14

Thousands of dollars

Agency and service 2014 2013 2012

Department of the Treasury

Treasury securities services

Treasury retail securities 54,966 55,334 60,208

Treasury securities safekeeping and transfer 16,568 14,397 14,131

Treasury auction 29,499 26,673 30,648

Computer infrastructure development and support 5,792 5,801 4,990

Other services 853 2,971 3,340

Total 107,678 105,176 113,317

Payment, collection, and cash-management services

Payment services 161,629 151,715 141,534

Collection services 54,355 44,788 41,456

Cash-management services 75,878 66,519 58,975

Computer infrastructure development and support 79,289 75,565 70,075

Other services 11,465 9,360 9,075

Total 382,615 347,947 321,115

Other Treasury

Total 44,756 42,826 37,011

Total, Treasury 535,049 495,949 471,443

Other federal agencies

Total, other agencies 34,588 34,077 34,569

Total reimbursable expenses 569,638 530,026 506,012

Note: The decrease in “Treasury Securities Services: Other Services” is due to the reclassification of programs into “Treasury Securities Services: Treasury Retail Securities.”

Federal Reserve Banks 99

In April 2014, as part of the federal government’s

effort to increase operational efficiency and effective-

ness, Treasury announced the consolidation of the

fiscal agency services provided by the Reserve Banks.

Although Treasury expects long-term savings by

reducing the number of Reserve Banks that provide

fiscal agency services, an increase in expenses is pro-

jected during the consolidation process. Select

Reserve Bank business lines began transitioning in

2014 and the consolidation is expected to conclude in

2018. Total consolidation expenses for 2014

amounted to $27.3 million. Consolidation expenses

are included in the line items for Payment, Collec-

tion, and Cash-management services in table 3. Of

the consolidation expenses, $6.7 million is attribut-

able to pension costs incurred by exiting Reserve

Banks.

Treasury Securities Services

The Reserve Banks work closely with Treasury’s Fis-

cal Service in support of the borrowing needs of the

federal government. The Reserve Banks auction,

issue, maintain, and redeem securities; provide cus-

tomer service; and operate the automated systems

supporting U.S. savings bonds and marketable Treas-

ury securities (bills, notes, and bonds). Treasury secu-

rities services consist of retail securities programs,

which primarily serve individual investors, and

wholesale securities programs, which serve institu-

tional customers.

Retail Securities Programs

Reserve Bank operating expenses for the retail securi-

ties programs were $55.0 million in 2014, a 0.7 per-

cent decrease compared with $55.3 million in 2013.

Increased operational efficiencies in retail securities

resulted in lower staffing levels and led to an overall

decrease in expenses. Throughout the year, Reserve

Banks and Treasury continued work on Treasury’s

Retail E-Services initiative to create a new customer

service and support environment. Reserve Banks also

engaged in an ongoing effort to decommission the

Legacy Treasury Direct system—established in 1986

as an application for investors to hold Treasury mar-

ketable securities (bills, notes, bonds, and Treasury

Inflation-Protected Securities)—in order to eliminate

aging technology platforms.

Wholesale Securities Programs

The Reserve Banks support wholesale securities pro-

grams through the sale, issuance, safekeeping, and

transfer of marketable Treasury securities for institu-

tional investors. The Reserve Banks conducted 270

Treasury securities auctions in 2014. Of the 270 auc-

tions, 12 auctions were for Floating Rate Notes—a

new marketable Treasury security with a floating rate

interest payment. Floating Rate Notes are the first

new Treasury security issued since the introduction of

Treasury Inflation-Protected Securities almost two

decades ago.

In 2014, Reserve Bank operating expenses in support

of Treasury securities auctions were $29.5 million,

compared with $26.7 million in 2013. This increase

was driven by upgrades to the auction system, which

receives and processes bids submitted primarily by

wholesale security auction participants.

Operating expenses associated with Treasury securi-

ties safekeeping and transfer activities were $16.6 mil-

lion in 2014, compared with $14.4 million in 2013.

The increase is attributable to the Reserve Banks’

ongoing technological effort to migrate securities ser-

vices from a mainframe system to a distributed com-

puting environment.

Payment Services

The Reserve Banks work closely with the Treasury’s

Fiscal Service and other government agencies to pro-

cess payments to individuals and companies. The

Reserve Banks process federal payroll payments,

Social Security and veterans’ benefits, income tax

refunds, vendor payments, and other types of

payments.

Reserve Bank operating expenses for payments-

related activity totaled $161.6 million in 2014, com-

pared with $151.7 million in 2013. Total payments-

related operating expenses in 2014 included

$17.0 million in consolidation expenses. The increase

in 2014 expenses was due to a combination of con-

solidation costs and increased programmatic

expenses associated with the Invoice Processing Plat-

for m (IPP), the Post Payment System (PPS) initiative,

Do Not Pay (DNP), and International Treasury Ser-

vices (ITS). These expense increases were partly off-

set by lower expenses for the U.S. Treasury Electronic

Payment Solution Center (formerly known as the Go

Direct Contact Center).

The IPP is part of Treasury’s all-electronic initia-

tive—an electronic invoicing and payment informa-

tion system that allows vendors to enter invoice data

electronically, either through a web-based portal or

100 101st Annual Report | 2014

electronic submission. The IPP accepts, processes,

and presents data from agencies and supplier systems

related to all stages of a payment transaction, includ-

ing the purchase order, invoice, and other payment

information. In 2014, the Reserve Banks’ IPP

expenses increased 42.0 percent, to $24.6 million.

This increase was primarily attributable to $5.3 mil-

lion in consolidation expenses. Additional program

expenses were incurred to increase staffing levels in

support of a Department of Defense mandate to

implement IPP for intragovernmental transactions, as

well as to provide support for broader agency partici-

pation and greater invoice volumes.

Reserve Banks continued work on the PPS initiative,

a multiyear effort to modernize several of Treasury’s

legacy post-payment processing systems into a single

application to provide a centralized and standardized

set of payment data, enhance operations, reduce

expenses, and improve data analytics capabilities. In

2014, program expenses for PPS increased 248.4 per-

cent, from $4.9 million to $17.0 million, as the result

of greater system development expenses and

$3.9 million in consolidation expenses.

In support of Treasury’s DNP initiative, the Reserve

Banks continued to enhance the DNP Portal, which

is a single point of access through which federal

agencies can query multiple data sources before mak-

ing federal payments. In 2014, expenses for DNP

increased 10.8 percent to $15.4 million, largely

because of additional staffing necessary to support

application development, advanced analytics, and

new data source purchases.

The Reserve Banks operate the ITS application,

which provides cross-border payment and collection

services as well as cash-management functions on

behalf of the Treasury. U.S. government agencies use

ITS to issue international benefit, payroll, and ven-

dor payments in 100 currencies to recipients in estab-

lished and emerging markets. ITS expenses increased

24.3 percent, to $17.9 million, in 2014 primarily

because of $3.7 million in consolidation costs.

The Treasury’s 2014 payments-related expenses were

offset by lower spending for the U.S. Treasury Elec-

tronic Payment Solution Center, which helps convert

individuals’ federal benefit payments from paper

check to electronic delivery. As of December 2014,

97.8 percent of all federal benefit payments were

made electronically. In 2014, expenses for the U.S.

Treasury Electronic Payment Solution Center

decreased 31.3 percent, to $16.4 million, primarily

because of a reduction in enrollment calls that fol-

lowed the end of the Go Direct Campaign.

Collection Services

The Reserve Banks also work closely with the Fiscal

Service to collect funds owed to the federal govern-

ment, including various taxes, fees for goods and ser-

vices, and delinquent debts. In 2014, Reserve Bank

operating expenses related to collection services

increased 21.4 percent to $54.4 million, largely

because of $3.7 million in consolidation expenses

and increased operating expenses for

Pay.gov and

eCommerce.

The Reserve Banks operate Pay.gov, an application

that allows the public to use the Internet to authorize

and initiate payments to federal agencies. During the

year, the Pay.gov program expanded to include 100

new agency programs and processed more than

123 million online payments totaling $144 billion, a

9 percent and a 20 percent increase, respectively, from

2013. Increased operational support and expanded

functionality resulted in expenses increasing 18.2 per-

cent, to $18.3 million.

The Reserve Banks also continued supporting the

Treasury’s electronic commerce initiative (eCom-

merce) to expand ways for agencies and the public to

do business with the Treasury through online bank-

ing solutions, mobile technologies, and other pay-

ment methods. Program expenses for eCommerce

increased from $156,000 in 2013 to $1.6 million in

2014, largely because of expenses associated with

developing a new mobile payment platfor m that will

facilitate more-efficient federal revenue collections.

Treasury Cash-Management Services

The Reserve Banks maintain Treasury’s operating

cash account and provide collateral-management and

collateral-monitoring services for those Treasury pro-

grams that have collateral requirements. The Reserve

Banks also support Treasury’s efforts to modernize

its financial management processes by developing

software, operating help desks, and managing proj-

ects on behalf of the Fiscal Service. In 2014, Reserve

Bank operating expenses related to Treasury cash-

management services totaled $75.9 million, compared

with $66.5 million in 2013. Total cash-management-

related operating expenses for 2014 included

$6.0 million in consolidation expenses.

Federal Reserve Banks 101

During 2014, the Reserve Banks continued to sup-

port Treasury’s efforts to improve centralized govern-

ment accounting and reporting functions. In particu-

lar, the Reserve Banks, in collaboration with the Fis-

cal Service, completed software development efforts

for the Central Accounting Reporting System

(CARS). CARS will provide Treasury with a mod-

ernized system for the collection and dissemination

of financial management and accounting informa-

tion transmitted by and to federal program agencies.

In 2014, expenses for CARS decreased to $18.6 mil-

lion, from $26.6 million in 2013, primarily because of

decreased application development expenses.

Services Provided to Other Entities

When permitted by federal statute or when required

by the Secretary of the Treasury, the Reserve Banks

provide fiscal agency and depository services to other

domestic and international entities.

Reserve Bank operating expenses for services pro-

vided to other entities were $34.6 million in 2014,

compared with $34.1 million in 2013. Book-entry

securities issuance and maintenance activities

account for a significant amount of the work per-

for med for other entities, with the majority per-

for med for the Federal Home Loan Mortgage Asso-

ciation (Freddie Mac), the Federal National Mort-

gage Association (Fannie Mae), and the Government

National Mortgage Association (Ginnie Mae).

Use of Federal Reserve

Intraday Credit

The Board’s PSR policy governs the use of Federal

Reserve Bank intraday credit, also known as daylight

overdrafts. A daylight overdraft occurs when an insti-

tution’s account activity creates a negative balance in

the institution’s Federal Reserve account at any time

in the operating day. Daylight overdrafts enable an

institution to send payments more freely throughout

the day than if it were limited strictly by its available

intraday funds balance. The PSR policy recognizes

explicitly the role of the central bank in providing

intraday balances and credit to healthy institutions;

under the policy, the Reserve Banks provide collater-

alized intraday credit at no cost.

Before the 2007–09 financial crisis, overnight bal-

ances were much lower and daylight overdrafts sig-

nificantly higher than levels observed since late 2008.

In 2007, for example, institutions held, on average,

less than $20 billion in overnight balances, and total

average daylight overdrafts were around $60 billion.

In contrast, institutions held historically high levels

of overnight balances—on average more than

$2.7 trillion—at the Reserve Banks in 2014, while

daylight overdrafts remained historically low. Aver-

age daylight overdrafts across the Federal Reserve

System declined to $1.62 billion in 2014 from

$1.9 billion in 2013, a decrease of about 17 percent

(see

figure 1). The average level of peak daylight

overdrafts fell to $8.44 billion in 2014 from $12 bil-

lion in 2013; the average level of peak daylight over-

drafts in 2014 was just a fraction of its level in 2008

(about 5 percent).

Daylight overdraft fees are also at historically low

levels. In 2014, institutions paid about $31,000 in

daylight overdraft fees; in contrast, fees totaled more

than $50 million in 2008. The decrease in fees is

largely attributable to the elevated level of reserve

balances that began to accumulate in late 2008 and to

the March 2011 policy revision that eliminated fees

for collateralized daylight overdrafts.

FedLine Access

to Reserve Bank Services

The Reserve Banks’ FedLine access solutions provide

depository institutions with a variety of alternatives

for electronically accessing the Banks’ payment and

information services. The Reserve Banks charge fees

for these electronic connections and allocate the asso-

ciated costs and revenue to the various priced ser-

vices. There are currently five FedLine channels

through which customers can access the Reserve

Banks’ priced services: FedMail, FedLine Web, Fed-

Line Advantage, FedLine Command, and FedLine

Figure 1. Aggregate daylight overdrafts, 2007–14

120

160

200

Peak daylight overdrafts

Average daylight overdrafts

Billions of dollars

20142013201220112010200920082007

102 101st Annual Report | 2014

Direct. These FedLine channels are designed to meet

the individual connectivity, security, and contingency

requirements of depository institution customers.

Between 2007 and 2014, the number of depository

institutions in the United States declined 22.2 per-

cent, and Reserve Bank FedLine connections

decreased 11.7 percent. During this same period, the

number of employees within depository institutions

who have FedLine credentials increased 11.6 percent,

reflecting in part the expansion of value-added ser-

vices provided. Additionally, the FedLine network

was broadened to nonfinancial services. Between

2012 and 2014, more than 10,000 credentials were

issued to individuals accessing central bank applica-

tions via FedLine.

The Reserve Banks continue to maintain their focus

on security and resiliency by upgrading critical ele-

ments of the FedLine solutions. The next-generation

virtual private network solution is a key component

of the security model for the FedLine Advantage and

FedLine Command access solutions used by approxi-

mately 5,000 financial institutions.

The solution

was certified for general availability in July 2013, and

the overall migration is nearing completion.

Information Technology

The Federal Reserve Banks continued to improve the

efficiency, effectiveness, and security of information

technology (IT) services and operations in 2014.

National IT continued its restructuring to streamline

the organization to maintain strong operational per-

for mance; streamline layers of management to

achieve a flatter, more efficient structure; and

strengthen skills and proficiency in critical areas.

Major multiyear programs to consolidate the Federal

Reserve’s IT operations and networking services were

completed and improved the overall efficiency and

quality of business operations. Additional efforts

helped System leaders articulate business needs

through IT roadmaps and to identify more opportu-

nities to employ common technology services and

solutions.

National IT also led an effort to institute common IT

principles throughout the System to motivate strate-

gic decisions and behaviors throughout System IT.

These principles provide a common foundation for

delivering IT services as effectively, securely, effi-

ciently, and innovatively as possible, and support the

System’s IT objective to deliver highly effective and

efficient IT services and solutions that support busi-

ness objectives and enhance productivity while safe-

guarding Federal Reserve data and assets.

Finally, under the direction of the chief information

security officer, management of the Federal Reserve’s

information systems (IS) risk continues to mature,

with priority given to cybersecurity and IS strategy.

The Federal Reserve remains vigilant about its cyber-

security posture, making thoughtful investments in

key risk-mitigation initiatives and programs and con-

tinuously monitoring and assessing cybersecurity

risks to its operations. In 2014, the Federal Reserve

completed its implementation of a new IS framework

for key systems. The framework, known as System

Assurance for the Federal Reserve, is based on guid-

ance from the National Institute of Standards and

Technology and adapted to the Federal Reserve’s

environment.

Examinations of the

Federal Reserve Banks

The Reserve Banks and several consolidated variable

interest entities (VIEs) operated by the Federal

Reserve System in response to the 2007–09 financial

crisis are subject to several levels of audit and

review.

The combined financial statements of the

Reserve Banks—as well as the financial statements of

each of the 12 Reserve Banks and Maiden Lane

LLC—are audited annually by an independent public

accountant retained by the Board of Governors.

addition, the Reserve Banks, including the consoli-

dated VIEs, are subject to oversight by the Board of

Governors, which performs its own reviews.

The Reserve Banks use the 2013 framework estab-

lished by the Committee of Sponsoring Organiza-

tions of the Treadway Commission (COSO) to assess

their internal controls over financial reporting,

Virtual private network or VPN technology supports remote,

secure, and private network access over a public network con-

nection, such as the Internet.

National IT supplies national infrastructure and business line

technology services to the Federal Reserve Banks and provides

guidance on the System’s information technology architecture

and business use of technology.

System IT is technology provisioned for and by Reserve Banks,

business lines, and National IT.

The New York Reserve Bank is considered to be the controlling

financial interest holder of each of the consolidated VIEs.

See “Federal Reserve Banks Combined Financial Statements” in

section 12 of this report.

Federal Reserve Banks 103

including the safeguarding of assets. Within this

framework, the management of each Reserve Bank

annually provides an assertion letter to its board of

directors that confirms adherence to COSO

standards.

The Federal Reserve Board engaged Deloitte &

Touche LLP (D&T) to audit the 2014 combined and

individual financial statements of the Reserve Banks

and Maiden Lane LLC.

In 2014, D&T also conducted audits of the internal

controls associated with financial reporting for each

of the Reserve Banks. Fees for D&T’s services

totaled $6.9 million, of which $0.4 million was for the

audit of Maiden Lane LLC. To ensure auditor inde-

pendence, the Board requires that D&T be indepen-

dent in all matters relating to the audits. Specifically,

D&T may not perform services for the Reserve

Banks or others that would place it in a position of

auditing its own work, making management deci-

sions on behalf of the Reserve Banks, or in any other

way impairing its audit independence. In 2014, the

Reserve Banks did not engage D&T for any non-

audit services.

The Board’s reviews of the Reserve Banks include a

wide range of off-site and on-site oversight activities,

conducted primarily by its Division of Reserve Bank

Operations and Payment Systems. Division personnel

monitor on an ongoing basis the activities of each

Reserve Bank and consolidated VIE, National IT,

and the System’s Office of Employee Benefits (OEB).

They conduct a comprehensive on-site review of each

Reserve Bank, and OEB at least once every three

years and review National IT, the System Open Mar-

ket Account (SOMA), and Fedwire annually.

The comprehensive on-site reviews include an assess-

ment of the internal audit function’s effectiveness

and its conformance to the Institute of Internal

Auditors’ (IIA) International Standards for the Pro-

fessional Practice of Internal Auditing, applicable

policies and guidance, the IIA’s code of ethics, and

the definition of internal auditing.

The Board also reviews SOMA and foreign currency

holdings to

•

determine whether the New York Reserve Bank,

while conducting the related transactions, complies

with the policies established by the Federal Open

Market Committee (FOMC); and

•

assess SOMA-related IT project management and

application development, vendor management, and

system resiliency and contingency plans.

In addition, D&T audits the year-end schedule of

participated asset and liability accounts and the

related schedule of participated income accounts.

The FOMC is provided with the external audit

reports and a report on the Board review.

Income and Expenses

Table 4 summarizes the income, expenses, and distri-

butions of net earnings of the Reserve Banks for

2014 and 2013. Income in 2014 was $116,562 million,

compared with $91,150 million in 2013.

Expenses totaled $12,579 million:

•

$6,862 million in interest paid to depository institu-

tions on reserve balances and term deposits;

•

$3,926 million in Reserve Bank operating expenses;

•

$383 million in net periodic pension expense;

•

$112 million in interest expense on securities sold

under agreements to repurchase;

•

$590 million in assessments for Board of Gover-

nors expenditure;

•

$711 million for new currency costs;

•

$563 million for Consumer Financial Protection

Bureau costs; and

•

$2 million in other costs.

The expenses were reduced by $570 million in reim-

bursements for services provided to government

agencies. Net deductions from current net income

totaled $2,718 million, which includes $2,907 million

in unrealized losses on foreign currency denominated

investments revalued to reflect current market

exchange rates, $110 million in net income associated

with consolidated VIEs, and $81 million in realized

gains on federal agency and GSE mortgage-backed

securities (GSE MBS). Dividends paid to member

banks, set at 6 percent of paid-in capital by sec-

In addition, D&T audited the Office of Employee Benefits of

the Federal Reserve System (OEB), the Retirement Plan for

Employees of the Federal Reserve System (System Plan), and

the Thrift Plan for Employees of the Federal Reserve System

(Thrift Plan). The System Plan and the Thrift Plan provide

retirement benefits to employees of the Board, the Federal

Reserve Banks, the OEB, and the Consumer Financial Protec-

tion Bureau.

One Bank leases office space to D&T.

104 101st Annual Report | 2014

tion 7(1) of the Federal Reserve Act, totaled

$1,686 million.

Comprehensive net income before interest on Federal

Reserve notes expense remitted to Treasury totaled

$99,653 million in 2014 (net income of $101,265 mil-

lion, decreased by other comprehensive loss of

$1,612 million). Earnings remittances to Treasury

totaled $96,902 million in 2014. The remittances

equal comprehensive income after the deduction of

dividends paid and the amount necessary to equate

the Reserve Banks’ surplus to paid-in capital.

Section 11 of this report, “Statistical Tables,” pro-

vides more detailed information on the Reserve

Banks and the VIEs.

Table 9 is a statement of condi-

tion for each Reserve Bank; table 10 details the

income and expenses of each Reserve Bank for 2014;

table 11 shows a condensed statement for each

Reserve Bank for the years 1914 through 2014; and

table 13 gives the number and annual salaries of offi-

cers and employees for each Reserve Bank. A

detailed account of the assessments and expenditures

of the Board of Governors appears in the Board of

Governors Financial Statements (see

section 12,

“Federal Reserve System Audits”).

SOMA Holdings and Loans

The Reserve Banks’ average net daily holdings of

securities and loans during 2014 amounted to

$4,055,301 million, an increase of $717,603 million

from 2013 (see

table 5).

Table 4. Income, expenses, and distribution of net earnings of the Federal Reserve Banks, 2014 and 2013

Millions of dollars

Item 2014 2013

Current income 116,562 91,150

Loan interest income 2 6

SOMA interest income 115,933 90,503

Other current income

627 641

Net expenses 10,715 9,135

Operating expenses 3,926 3,765

Reimbursements -570 -530

Net periodic pension expense 383 617

Interest paid on depository institutions deposits and term deposits 6,862 5,223

Interest expense on securities sold under agreements to repurchase 112 60

Other expenses 2 0

Current net income 105,847 82,015

Net additions to (deductions from) current net income -2,718 -1,029

Federal agency and government-sponsored enterprise mortgage-backed securities 81 51

Foreign currency translation losses -2,907 -1,257

Net income (loss) from consolidated VIEs 110 181

Other deductions -2 -4

Assessments by the Board of Governors 1,864 1,845

For Board expenditures 590 580

For currency costs 711 702

For Consumer Financial Protection Bureau costs

563 563

Net income before providing for remittances to the Treasury 101,265 79,141

Earnings remittances to the Treasury 96,902 79,633

Net income (loss) 4,363 -492

Other comprehensive (loss) gain -1,612 2,289

Comprehensive income 2,751 1,797

Total distribution of net income 99,653 81,430

Dividends on capital stock 1,686 1,650

Transfer to surplus and change in accumulated other comprehensive income 1,065 147

Earnings remittances to the Treasury 96,902 79,633

Certain amounts relating to 2013 have been reclassified to conform to the current-year presentation.

Includes income from priced services, compensation received for services provided, and securities lending fees.

The Board of Governors assesses the Reserve Banks to fund the operations of the Consumer Financial Protection Bureau.

Federal Reserve Banks 105

SOMA Securities Holdings

The average daily holdings of Treasury securities

increased by $427,351 million, to an average daily

amount of $2,520,120 million. The average daily

holdings of GSE debt securities decreased by

$23,750 million, to an average daily amount of

$46,122 million. The average daily holdings of

federal agency and GSE MBS increased by

$450,711 million, to an average daily amount of

$1,700,521 million.

The increases in average daily holdings of Treasury

securities and federal agency and GSE MBS are due

to the purchases through a large-scale asset purchase

program and reinvestment of principal payments

from other SOMA holdings in federal agency and

GSE MBS. The average daily holdings of GSE debt

securities decreased as a result of maturities.

There were no significant holdings of securities pur-

chased under agreements to resell in 2014 or 2013.

Average daily holdings of foreign currency denomi-

nated investments in 2014 were $23,296 million, com-

pared with $23,941 million in 2013. The average daily

balance of central bank liquidity swap drawings was

$192 million in 2014 and $3,361 million in 2013. The

average daily balance of securities sold under agree-

ments to repurchase was $233,249 million, an

increase of $133,569 million from 2013.

The average rates of interest earned on the Reserve

Banks’ holdings of Treasury securities increased to

2.50 percent and the average rates on GSE debt secu-

rities increased to 3.42 percent in 2014. The average

rate of interest earned on federal agency and GSE

MBS increased to 3.01 percent in 2014. The average

interest rates for securities sold under agreements to

repurchase decreased to 0.05 percent in 2014. The

Table 5. System Open Market Account (SOMA) holdings and loans of the Federal Reserve Banks, 2014 and 2013

Millions of dollars, except as noted

Item

Average daily assets (+)/liabilities (–) Current income (+)/expense (–) Average interest rate (percent)

2014 2013 2014 2013 2014 2013

U.S. Treasury securities

2,520,120 2,092,769 63,011 51,591 2.50 2.47

Government-sponsored enterprise debt (GSE) securities

46,122 69,872 1,579 2,166 3.42 3.10

Federal agency and GSE mortgage-backed securities

1,700,521 1,249,810 51,264 36,628 3.01 2.93

Foreign currency denominated investments

23,296 23,941 78 96 0.33 0.40

Central bank liquidity swaps

192 3,361 1 22 0.52 0.65

Other SOMA assets

28 63 * * 0.01 0.03

Total SOMA assets 4,290,279 3,439,816 115,933 90,503 2.70 2.63

Securities sold under agreements to repurchase -233,249 -99,680

-112 -60 0.05 0.06

Other SOMA liabilities

-1,899 -2,781 n/a n/a n/a n/a

Total SOMA liabilities -235,148 -102,461

-112 -60 0.05 0.06

Total SOMA holdings 4,055,131 3,337,355

115,821 90,443 2.86 2.55

Primary, secondary, and seasonal credit 118 79 * * 0.21 0.25

Total loans to depository institutions 118 79 * * 0.21 0.25

Term Asset-Backed Securities Loan Facility (TALF)

52 264 2 6 3.85 2.27

Total loans to others 52 264 2 6 3.85 2.27

Total loans 170 343 2 6 1.18 1.75

Total SOMA holdings and loans 4,055,301 3,337,698

115,823 90,449 2.86 2.55

Face value, net of unamortized premiums and discounts.

Face value, which is the remaining principal balance of the securities, net of unamortized premiums and discounts. Does not include unsettled transactions.

Includes accrued interest. Foreign currency denominated assets are revalued daily at market exchange rates.

Dollar value of foreign currency held under these agreements valued at the exchange rate to be used when the foreign currency is returned to the foreign central bank. This

exchange rate equals the market exchange rate used when the foreign currency was acquired from the foreign central bank.

Cash and short-term investments related to the federal agency and government-sponsored enterprise mortgage-backed securities (GSE MBS) portfolio.

Represents the obligation to return cash margin posted by counterparties as collateral under commitments to purchase and sell federal agency and GSE MBS, as well as

obligations that arise from the failure of a seller to deliver securities on the settlement date.

Represents the remaining principal balance. During the year ended December 31, 2014, all remaining TALF loans were repaid in full, including accrued interest.

r Revised.

n/a Not applicable.

* Less than $500 thousand.

106 101st Annual Report | 2014

average rate of interest earned on foreign currency

denominated investments decreased to 0.33 percent

while the average rate of interest earned on central

bank liquidity swaps decreased to 0.52 percent in

2014.

Lending

In 2014, the average daily primary, secondary, and

seasonal credit extended by the Reserve Banks to

depository institutions increased by $39 million, to

$118 million. The average rate of interest earned on

primary, secondary, and seasonal credit decreased to

0.21 percent in 2014, from 0.25 percent in 2013. The

average daily balance of Term Asset-Backed Securi-

ties Loan Facility (TALF) loans in 2014 was $52 mil-

lion, a decrease of $212 million from 2013. The aver-

age rate of interest earned on TALF loans in 2014

was 3.85 percent.

Investments of the Consolidated VIEs

Certain lending facilities established during 2008 and

2009, under authority of section 13(3) of the Federal

Reserve Act, involved creating and lending to the

consolidated VIEs (see

table 6). Consistent with gen-

erally accepted accounting principles (GAAP), the

assets and liabilities of these VIEs have been consoli-

dated with the assets and liabilities of the New York

Reserve Bank in the preparation of the statements of

condition included in this report.

Net portfolio assets of the consolidated VIEs

decreased from $1,926 million in 2013 to $1,811 mil-

Table 6. Key financial data for consolidated variable interest entities (VIEs), 2014 and 2013

Millions of dollars

Item

TALF LLC Maiden Lane LLC Maiden Lane II LLC Maiden Lane III LLC Total VIEs

2014 2013 2014 2013 2014 2013 2014 2013 2014 2013

Net portfolio assets of the consolidated VIEs and the net position of the New York Reserve Bank (FRBNY) and subordinated interest holders

Net portfolio assets

0 109 1,811 1,732 0 63 0 22 1,811 1,926

Liabilities of consolidated VIEs 0 0 -127 -157 0 0 0 0 -127 -157

Net portfolio assets available

0 109 1,684 1,575 0 63 0 22 1,684 1,769

Loans extended to the consolidated

VIEs by the FRBNY

0 0 0 0 0 0 0 0 0 0

Other beneficial interests

0 0 0 0 0 0 0 0 0 0

Total loans extended to the

consolidated VIEs by the FRBNY and

other beneficial interests 0 0 0 0 0 0 0 0 0 0

Cumulative change in net assets since the inception of the program

Allocated to FRBNY 0 11 1,684 1,575 0 53 0 15 1,684 1,654

Allocated to other beneficial interests 0 98 0 0 0 10 0 7 0 115

Cumulative change in net assets 0 109 1,684 1,575 0 63 0 22 1,684 1,769

Summary of consolidated VIE net income, including a reconciliation of total consolidated VIE net income to the consolidated VIE net income

Portfolio interest income

* 0 77 2 * 4 * * 77 6

Portfolio holdings gains (losses) * -573 37 183 0 0 * 0 37 -390

Professional fees * -1 -4 -6 * -1 * * -4 -8

Net income (loss) of consolidated VIEs * -574 110 179 * 3 * * 110 -392

Less: Net income (loss) allocated to

other beneficial interests * 574 0 0 * -1 * * 0 573

Net income (loss) allocated to and

recorded by FRBNY

* 0 110 179 * 2 * 0 110 181

TALF, Maiden Lane, Maiden Lane II, and Maiden Lane III holdings are recorded at fair value. Fair value reflects an estimate of the price that would be received upon selling an

asset if the transaction were to be conducted in an orderly market on the measurement date.

Represents the net assets available for distribution to FRBNY and “other beneficiaries” of the consolidated VIEs. During the year ended December 31, 2014, all remaining

assets of TALF LLC, Maiden Lane II, and Maiden Lane III, were distributed to the FRBNY and other beneficial interest holders and these entities were dissolved.

The remaining balances of the loans extended to the consolidated VIEs by the FRBNY and by amounts provided to the VIEs by other beneficial interest holders were repaid in

full, including accrued interest, during the years ended December 31, 2012, and December 31, 2013.

Represents the allocation of the change in net assets and liabilities of the consolidated VIEs that are available for distribution to FRBNY and the other beneficiaries of the

consolidated VIEs. The differences between the fair value of the net assets available and the book value of the loans (including accrued interest) are indicative of gains or

losses that would be incurred by the beneficiaries if the assets had been fully liquidated at prices equal to the fair value.

Interest income is recorded when earned and includes amortization of premiums, accretion of discounts, and paydown gains and losses.

In addition to the net income attributable to TALF LLC, FRBNY earned $3 million on TALF loans during the year ended December 31, 2013 (interest income of $6 million and a

loss on the valuation of loans of $3 million).

* Less than $500 thousand.

Federal Reserve Banks 107

lion in 2014. In 2013, the loan extended to TALF

LLC by the Treasury was repaid in full, including

outstanding principal and accrued interest. During

2014, final distributions of assets were made by

Maiden Lane II LLC, Maiden Lane III LLC, and

TALF LLC, and the entities were dissolved.

Federal Reserve Bank Premises

Several Reserve Banks took action in 2014 to main-

tain and renovate their facilities. The multiyear reno-

vation programs at the Boston, New York, Rich-

mond, St. Louis, and San Francisco Reserve Banks’

headquarters buildings continued. All Reserve Banks

continued to implement projects to maintain building

systems to ensure efficient and reliable operations.

The New York Reserve Bank continued repairs and

renovations to the 33 Maiden Lane building, and the

Chicago Federal Reserve Bank continued construc-

tion of security enhancements to its building. In

2014, the Dallas Reserve Bank moved to leased office

space for its San Antonio Branch and sold the build-

ing that previously housed the Branch’s operations.

For more information on the acquisition costs and

net book value of the Reserve Banks and Branches,

see

table 14 in the “Statistical Tables” section of this

report.

108 101st Annual Report | 2014

Pro Forma Financial Statements for Federal Reserve Priced Services

Table 7. Pro forma balance sheet for Federal Reserve priced services, December 31, 2014 and 2013

Millions of dollars

Item 2014 2013

Short-term assets (Note 1)

Imputed investments 556.7 913.3

Receivables 36.9 36.2

Materials and supplies 0.7 0.9

Prepaid expenses 11.1 6.6

Items in process of collection 85.7 165.3

Total short-term assets 691.2 1,122.5

Long-term assets (Note 2)

Premises 131.2 144.2

Furniture and equipment 35.9 32.5

Leases, leasehold improvements, and long-term prepayments 101.7 95.0

Prepaid pension costs 0.0 59.2

Deferred tax asset 325.6 291.8

Total long-term assets 594.4 622.8

Total assets 1,285.6 1,745.3

Short-term liabilities

Deferred-availability items 642.4 1,078.6

Short-term debt 24.8 20.4

Short-term payables 24.0 23.4

Total short-term liabilities 691.2 1,122.5

Long-term liabilities

Long-term debt 60.9 129.4

Accrued benefit costs 459.3 406.1

Total long-term liabilities 520.2 535.5

Total liabilities 1,211.4 1,658.0

Equity (including accumulated other comprehensive loss of $549.7 million

and $466.2 million at December 31, 2014 and 2013, respectively) 74.2 87.3

Total liabilities and equity (Note 3) 1,285.6 1,745.3

Note: Components may not sum to totals because of rounding. The accompanying notes are an integral part of these pro forma priced services financial statements.

Federal Reserve Banks 109

Table 8. Pro forma income statement for Federal Reserve priced services, 2014 and 2013

Millions of dollars

Item 2014 2013

Revenue from services provided to depository institutions (Note 4) 433.1 441.2

Operating expenses (Note 5) 399.0 385.5

Income from operations 34.1 55.7

Imputed costs (Note 6)

Interest on debt 7.1 0.1

Interest on float -0.5 -0.7

Sales taxes 4.5 11.0 4.4 3.8

Income from operations after imputed costs 23.0 51.9

Other income and expenses (Note 7)

Investment income 0.0 0.1 0.1

Income before income taxes 23.0 52.0

Imputed income taxes (Note 6) 8.6 20.0

Net income 14.5 32.0

Memo: Targeted return on equity (Note 6) 5.5 4.2

Note: Components may not sum to totals because of rounding. The accompanying notes are an integral part of these pro forma priced services financial statements.

Table 9. Pro forma income statement for Federal Reserve priced services, by service, 2014

Millions of dollars

Item Total

Commercial check

collection

Commercial ACH Fedwire funds Fedwire securities

Revenue from services (Note 4) 433.1 174.7 124.4 110.1 24.0

Operating expenses (Note 5)

399.0 130.9 147.2 99.5 21.4

Income from operations 34.1 43.8 -22.9 10.5 2.6

Imputed costs (Note 6) 11.0 3.4 4.2 2.9 0.6

Income from operations after imputed costs 23.0 40.4 -27.0 7.7 2.0

Other income and expenses, net (Note 7) 0.0 0.0 0.0 0.0 0.0

Income before income taxes 23.0 40.4 -27.0 7.7 2.0

Imputed income taxes (Note 6) 8.6 15.0 -10.1 2.9 0.7

Net income 14.5 25.4 -17.0 4.8 1.2

Memo: Targeted return on equity (Note 6) 5.5 1.8 2.0 1.4 0.3

Cost recovery (percent) (Note 8) 102.1 115.6 86.7 103.2 104.1

Note: Components may not sum to totals because of rounding. The accompanying notes are an integral part of these pro forma priced services financial statements.

Operating expenses include pension costs, Board expenses, and reimbursements for certain nonpriced services.

110 101st Annual Report | 2014

Notes to Pro Forma Financial Statements for Priced Services

(1) Short-Term Assets

Receivables are composed of fees due the Reserve Banks for providing priced ser-

vices and the share of suspense- and difference-account balances related to priced

services.

Items in process of collection are gross Federal Reserve cash items in process of

collection (CIPC), stated on a basis comparable to that of a commercial bank.

They reflect adjustments for intra-Reserve Bank items that would otherwise be

double-counted on the combined Federal Reserve balance sheet and adjustments

for items associated with nonpriced items (such as those collected for government

agencies). Among the costs to be recovered under the Monetary Control Act is the

cost of float, or net CIPC during the period (the difference between gross CIPC

and deferred-availability items, which is the portion of gross CIPC that involves a

financing cost), valued at the federal funds rate. Investments of excess financing

derived from credit float are assumed to be invested in federal funds.

(2) Long-Term Assets

Long-term assets consist of long-term assets used solely in priced services and the

priced-service portion of long-term assets shared with nonpriced services, includ-

ing a deferred tax asset related to the priced services pension and postretirement

benefits obligation. The tax rate associated with the deferred tax asset was

37.2 percent and 38.5 percent for 2014 and 2013, respectively.

Long-term assets also consist of an estimate of the assets of the Board of Gover-

nors used in the development of priced services.

(3) Liabilities and Equity

Under the matched-book capital structure for assets, short-term assets are

financed with short-term payables and imputed short-term debt, if needed. Long-

term assets are financed with long-term liabilities, imputed long-term debt, and

imputed equity, if needed. To meet the Federal Deposit Insurance Corporation

(FDIC) requirements for a well-capitalized institution, in 2014 equity is imputed at

5.8 percent of total assets and 10 percent of risk-weighted assets, and in 2013

equity is imputed at 5.0 percent of total assets and 10.2 percent of risk-weighted

assets. In accordance with Accounting Standards Codification (ASC) Topic 715

(ASC 715), Compensation–Retirement Benefits, the Reserve Banks recorded the

funded status of pension and other benefit plans on their balance sheets. To reflect

the funded status of their benefit plans, the Reserve Banks recognized the deferred

items related to these plans, which include prior service costs and actuarial gains or

losses, on the balance sheet. This resulted in an adjustment to the pension and

other benefit plan liabilities related to priced services and the recognition of an

associated deferred tax asset with an offsetting adjustment, net of tax, to accumu-

lated other comprehensive income (AOCI), which is included in equity. The

Reserve Bank priced services recognized a pension liability, which is a component

of accrued benefit costs, of $42.0 million and a pension asset of $59.2 million in

2014 and 2013, respectively. The change in the funded status of the pension and

other benefit plans resulted in a corresponding increase in accumulated other com-

prehensive loss of $83.5 million in 2014.

Federal Reserve Banks 111

(4) Revenue

Revenue represents fees charged to depository institutions for priced services and

is realiz ed from each institution through direct charges to an institution’s account.

(5) Operating Expenses

Operating expenses consist of the direct, indirect, and other general administrative

expenses of the Reserve Banks for priced services and the expenses of the Board

related to the development of priced services. Board expenses were $4.1 million in

2014 and $4.0 million in 2013.

In accordance with ASC 715, the Reserve Bank priced services recognized quali-

fied pension-plan operating expenses of $22.7 million in 2014 and $45.4 million in

2013. Operating expenses also include the nonqualified net pension expense of

$4.7 million in 2014 and net pension credit of $0.7 million in 2013. The implemen-

tation of ASC 715 does not change the systematic approach required by GAAP to

recognize the expenses associated with the Reserve Banks’ benefit plans in the

income statement. As a result, these expenses do not include amounts related to

changes in the funded status of the Reserve Banks’ benefit plans, which are

reflected in AOCI.

The income statement by service reflects revenue, operating expenses, imputed

costs, other income and expenses, and cost recovery.

(6) Imputed Costs

Imputed costs consist of income taxes, return on equity, interest on debt, sales

taxes, and interest on float. Many imputed costs are derived from the PSAF

model. The 2014 cost of short-term debt imputed in the PSAF model is based on

nonfinancial commercial paper rates; the cost of imputed long-term debt is based

on Merrill Lynch Corporate and High Yield Index returns; and the effective tax

rate is derived from U.S. publicly traded firm data, which serve as the proxy for the

financial data of a representative private-sector firm. The after-tax rate of return

on equity is based on the returns of the equity market as a whole.

Interest is imputed on the debt assumed necessary to finance priced-service assets.

These imputed costs are allocated among priced services according to the ratio of

operating expenses, less shipping expenses, for each service to the total expenses,

less the total shipping expenses, for all services.

Interest on float is derived from the value of float to be recovered for the check

and ACH services, Fedwire Funds Service, and Fedwire Securities Services through

per-item fees during the period. Float income or cost is based on the actual float

incurred for each priced service.

Details regarding the PSAF methodology change can be found at www.gpo.gov/fdsys/pkg/FR-2012-

11-08/pdf/2012-26918.pdf

112 101st Annual Report | 2014

The following shows the daily average recovery of actual float by the Reserve

Banks for 2014, in millions of dollars:

Total float -590.8

Unrecovered float 4.7

Float subject to recovery through per item fees -595.5

Unrecovered float includes float generated by services to government agencies and

by other central bank services. Float that is created by account adjustments due to

transaction errors and the observance of nonstandard holidays by some deposi-

tory institutions was recovered from the depository institutions through charging

institutions directly. Float subject to recovery is valued at the federal funds rate.

Certain ACH funding requirements and check products generate credit float; this

float has been subtracted from the cost base subject to recovery in 2014 and 2013.

(7) Other Income and Expenses

Other income consists of income on imputed investments. Excess financing result-

ing from additional equity imputed to meet the FDIC well-capitalized require-

ments is assumed to be invested and earning interest at the 3-month Treasury bill

rate.

(8) Cost Recovery

Annual cost recovery is the ratio of revenue, including other income, to the sum of

operating expenses, imputed costs, imputed income taxes, and after-tax targeted

return on equity.

Federal Reserve Banks 113

Other Federal Reserve

Operations

Regulatory Developments:

Dodd-Frank Act Implementation

Throughout 2014, the Federal Reserve continued to

implement the Dodd-Frank Wall Street Reform and

Consumer Protection Act (Dodd-Frank Act) (Pub. L.

No. 111-203), which gives the Federal Reserve impor-

tant responsibilities to issue rules and supervise

financial companies to enhance financial stability and

preserve the safety and soundness of the banking

system. The Board also continued to implement other

regulatory reforms to increase the resiliency of bank-

ing organizations and help to ensure that they are

operating in a safe and sound manner.

The following is a summary of the key regulatory ini-

tiatives that were completed during 2014.

Enhanced Prudential Standards for

U.S. and Foreign Banking Organizations

Section 165 of the Dodd-Frank Act requires the

Board to establish enhanced prudential standards for

bank holding companies (BHCs) and foreign bank-

ing organizations with total consolidated assets of

$50 billion or more and nonbank financial compa-

nies that have been designated by the Financial Sta-

bility Oversight Council (FSOC) for supervision by

the Board. The standards must include enhanced

risk-based and leverage capital; liquidity, risk-

management, and risk-committee requirements; a

requirement to submit a resolution plan; single-

counterparty credit limits; stress tests requirements;

and, for companies that the FSOC has determined

pose a grave threat to financial stability, a debt-to-

equity limit. Section 165 also permits the Board to

establish additional prudential standards, including

three enumerated standards—a contingent capital

requirement, enhanced public disclosures, and short-

term debt limits—and other prudential standards

that the Board determines are appropriate.

In February 2014, the Board adopted a final rule to

implement enhanced prudential standards under the

Dodd-Frank Act for BHCs and foreign banking

organizations with $50 billion or more in total con-

solidated assets. For a BHC with total consolidated

assets of $50 billion or more, the final rule adopts

enhanced risk-management and liquidity require-

ments. The 165 final rule also incorporates the

Board’s capital, capital planning, and stress testing

requirements as enhanced prudential standards.

For a foreign banking organization with total con-

solidated assets of $50 billion or more, the final rule

implements enhanced risk-based and leverage capital,

liquidity, risk-management, and stress testing

requirements. In addition, the final rule requires for-

eign banking organizations with U.S. non-branch

assets of $50 billion or more to form a U.S. interme-

diate holding company and imposes enhanced pru-

dential standards on that intermediate holding com-

pany. Generally, as the size, complexity, and risk to

U.S. f inancial stability of a U.S. BHC or foreign

banking organization increases, the standards

imposed on the organization become more stringent,

mitigating risks to the financial stability of the

United States posed by the material financial distress

or failure of the institution.

Finally, the final rule also establishes a risk-

committee requirement for publicly traded U.S. and

foreign banking organizations with total consolidated

assets of $10 billion or more, implements stress test-

ing requirements for foreign banking organizations

and foreign savings and loan holding companies with

total consolidated assets of more than $10 billion,

and requires companies that the FSOC has deter-

mined pose a grave threat to the financial stability of

115

the United States achieve and maintain a debt-to-

equity ratio of no more than 15 to 1.

Continued Implementation of the

Regulatory Capital Framework

In July 2013, the Board issued a final rule to compre-

hensively revise the capital regulations applicable to

banking organizations (revised capital framework).

The revised capital framework strengthens the defini-

tion of regulatory capital, generally increases the

minimum risk-based capital requirements, modifies

the methodologies for calculating risk-weighted

assets, and imposes a minimum generally applicable

leverage ratio of 4 percent (measured as the ratio of

tier 1 capital to on-balance-sheet assets). In addition,

internationally active banking organizations must

meet a minimum supplementary leverage ratio of

3 percent (measured as the ratio of tier 1 capital to

on- and off-balance-sheet exposures). The rule was

published jointly with the Office of the Comptroller

of the Currency (OCC), and the Federal Deposit

Insurance Corporation (FDIC) published a substan-

tively identical rule.

The Board continued to develop and enhance the

regulatory capital framework in 2014. In April 2014,

the Board, the FDIC, and the OCC adopted a final

rule that enhances the supplementary leverage ratio

requirement described above for the largest, most

interconnected U.S. banking organizations. A BHC

with at least $700 billion in total consolidated assets

or at least $10 trillion in assets under custody must

maintain a supplementary leverage ratio of 5 percent

or more in order to avoid limitations on distributions

and certain discretionary bonus payments, and their

insured depository institution subsidiaries must

maintain a supplementary leverage ratio of 6 percent

or more to be “well capitalized.” These enhanced

supplementary leverage ratio standards are designed

to help reduce the probability of failure of systemi-

cally important banking organizations, thereby miti-

gating the risks to the financial stability of the

United States posed by these organizations.

In 2014, the agencies issued three other final rules to

adjust aspects of the regulatory capital framework.

In July 2015, the agencies adopted a final rule to cor-

rect the definition of “eligible guarantee.” In Septem-

ber 2014, the agencies adopted a final rule to revise

the definition of total leverage exposure used in the

calculation of the supplementary leverage ratio. Spe-

cifically, the final rule modifies the methodology for

including off-balance-sheet items, such as credit

derivatives, repo-style transactions, and lines of

credit, in the denominator of the supplementary

leverage ratio to more appropriately capture a bank-

ing organization’s on- and off-balance-sheet expo-

sures. In December 2014, the Board and the OCC

adopted an interim final rule to adjust the definition

of “qualifying master netting agreement” and related

definitions in the regulatory capital and the liquidity

coverage ratio rules. The changes were intended to

ensure that the regulatory capital and liquidity treat-

ment of certain financial transactions is not affected

by the implementation of special resolution regimes

in foreign jurisdictions or by contractual provisions

that incorporate stays of special resolution regimes.

Capital Planning and Stress Testing

Requirements

On an annual basis, the Federal Reserve assesses

whether BHCs with total consolidated assets of

$50 billion or more have effective capital planning

processes and sufficient capital to absorb losses dur-

ing stressful conditions, while meeting obligations to

creditors and counterparties and continuing to serve

as credit intermediaries. This annual assessment

includes two related programs: the Comprehensive

Capital Analysis and Review (CCAR), which evalu-

ates a BHC’s capital adequacy, capital adequacy pro-

cess, and planned capital distributions in accordance

with the Board’s capital plan rule, and the Dodd-

Frank Act supervisory stress tests. Pursuant to the

Dodd-Frank Act, BHCs and state member banks

with more than $10 billion in total consolidated

assets are required to conduct company-run stress

tests.

On October 16, 2014, the Board revised its capital

plan and stress testing rules to adjust the time frame

for annual submissions of capital plans and the

company-run and supervisory stress tests. Beginning

in 2016, participating BHCs must submit their capital

plans and stress testing results to the Federal Reserve

on or before April 5.

Liquidity Requirements for Large

Financial Institutions

In October 2014, the Board, the OCC, and the FDIC

issued a final rule implementing the liquidity cover-

age ratio (LCR), a quantitative liquidity requirement

for large and internationally active banking organiza-

tions. The LCR is the first broadly applicable quanti-

See 78 Federal Register 62018 (October 11, 2013).

116 101st Annual Report | 2014

tative liquidity requirement for U.S. banking firms

and establishes an enhanced prudential liquidity

standard consistent with the Dodd-Frank Act.

Under the final rule, covered banking firms will be

required to maintain a minimum amount of high-

quality liquid assets sufficient to cover their net cash

outflows over a 30-calendar-day period in a stan-

dardized supervisory stress scenario. The most strin-

gent LCR requirements apply to banking organiza-

tions with consolidated total assets of $250 billion or

more or consolidated total on-balance-sheet foreign

exposure of $10 billion or more and their subsidiary

insured depository institutions with $10 billion or

more of consolidated total assets. The rule applies a

simpler, less stringent LCR requirement to certain

smaller depository institution holding companies

with $50 billion or more that are not otherwise cov-

ered by the rule.

Credit-Risk Retention

In December 2014, the Board—jointly with other

federal banking agencies, the Department of Hous-

ing and Urban Development, the Federal Housing

Finance Agency, and the Securities and Exchange

Commission (SEC)—approved a final rule to imple-

ment the credit-risk retention requirements in the

Dodd-Frank Act. The final rule generally requires

the sponsors of securitization transactions to retain

not less than 5 percent of the credit risk of the assets

they securitize and includes prohibitions on transfer-

ring or hedging the retained credit risk. The f inal rule

provides exemptions for asset-backed securities that

are collateralized exclusively by residential mortgages

that qualify as qualified residential mortgages

(QRMs). In addition, the final rule does not require

risk retention for securitizations of commercial loans,

commercial mortgages, or automobile loans, pro-

vided that the transactions meet specific standards

for high-quality underwriting. The implementing

agencies have agreed to review the QRM definition

and its effect on the residential mortgage market no

later than four years after the rule’s effective date and

periodically thereafter.

The Volcker Rule: Prohibitions against

Proprietary Trading and Other Activities

Section 619 of the Dodd-Frank Act generally prohib-

its insured depository institutions (IDIs) and their

affiliates (collectively, banking entities) from engag-

ing in proprietary trading or from investing in, spon-

soring, or having certain relationships with a hedge

fund or private equity fund. These prohibitions and

other provisions of section 619 are commonly known

as the “Volcker rule.”

In January 2014, the Board, the FDIC, the OCC, the

SEC, and the Commodity Futures Trading Commis-

sion approved an interim final rule permitting bank-

ing entities to retain interests in, and act as sponsors

to, certain collateralized debt obligations backed pri-

marily by trust preferred securities that meet the defi-

nition of covered funds, as permitted under the

grandfathering provisions for certain trust preferred

securities in the Dodd-Frank Act. The interim final

rule, a companion rule to the Volcker rule approved

in December 2013, establishes specific qualifications

for the type of covered funds that may be retained.

Financial Sector Concentration Limits

In November 2014, the Board issued a final rule to

implement section 622 of the Dodd-Frank Act,

which generally prohibits a f inancial company from

merging or consolidating with, or from acquiring,

another company if the resulting company’s liabili-

ties would exceed 10 percent of the aggregate liabili-

ties of all financial companies. Financial companies

subject to the limit include insured depository institu-

tions, BHCs, savings and loan holding companies,

foreign banking organizations, companies that con-

trol insured depository institutions, and nonbank

financial companies designated by the FSOC for

Board supervision. In addition, the final rule estab-

lishes reporting requirements for financial companies

that do not otherwise report consolidated financial

information to the Board or another federal banking

agency, in accordance with the Bank Holding Com-

pany Act.

Risk-Management Standards

for Financial Market Utilities

Title VIII of the Dodd-Frank Act establishes a

supervisory framework for financial market utilities

(FMUs) that are designated as systemically impor-

tant by the FSOC. FMUs are multilateral systems

that provide the essential infrastructure for transfer-

ring, clearing, and settling payments, securities, and

other financial transactions among financial institu-

tions or between financial institutions and the

system.

In October 2014, the Board approved final amend-

ments to Regulation HH regarding the risk-

management standards for FMUs that have been

designated as systemically important by the FSOC

Other Federal Reserve Operations 117

and for which the Board has standard-setting author-

ity under the Dodd-Frank Act. The Board also

approved revisions to the Federal Reserve Policy on

Payment System Risk, which applies to financial

market infrastructures more generally, including

those operated by the Federal Reserve Banks.

The

final rule adopts standards to address credit risk and

liquidity risk, new requirements on recovery and

orderly wind-down planning, a new standard on gen-

eral business risk, a new standard on tiered participa-

tion arrangements, and heightened requirements on

transparency and disclosure.

Key Regulatory Initiatives Proposed

in 2014

A number of important regulatory developments are

in the proposal stage. The following is a summary of

additional regulatory initiatives that the Board pro-

posed in 2014.

Capital Surcharge for Global Systemically

Important Banking Organizations

In December 2014, the Board invited comment on a

proposed rule that would establish a methodology to

identify whether a U.S. BHC is a global systemically

important banking organization (GSIB). As such, a

GSIB would be subject to a risk-based capital sur-

charge that is calibrated based on its systemic risk

profile. The proposal builds on a GSIB capital sur-

charge framework designed by the Basel Committee

on Banking Supervision and augments that frame-

work to address the risk arising from reliance on

short-term wholesale funding. Failure to maintain

the capital surcharge would subject the GSIB to

restrictions on capital distributions and certain dis-

cretionary bonus payments.

Enhanced Prudential Standards for the

Regulation and Supervision of General Electric

Capital Corporation

In December 2014, the Board invited public com-

ment on enhanced prudential standards for the regu-

lation and supervision of General Electric Capital

Corporation (GECC), a nonbank financial company

that the FSOC designated for supervision by the

Board. In light of the substantial similarity of

GECC’s activities and risk profile to that of a simi-

larly sized BHC, the proposal would apply enhanced

prudential standards to GECC that are generally

similar to those that apply to large BHCs, including

standards for risk-based and leverage capital, capital

planning, stress testing, liquidity, and risk

management.

Clarifications to Regulatory Capital Rules

The Board continues to implement the regulatory

capital rules. In December 2014, the federal banking

agencies issued a proposed rule to make technical

corrections and clarify certain aspects of the

advanced approaches rule. Also in December 2014,

the Board issued a proposed rule to provide addi-

tional information regarding the application of the

Board’s regulatory capital framework to depository

institution holding companies that have nontradi-

tional capital structures.

For more information on the Federal Reserve Policy on Pay-

ment System Risk, see

www.federalreserve.gov/paymentsystems/

psr_about.htm

118 101st Annual Report | 2014

The Board of Governors and the

Government Performance and

Results Act

Overview

The Government Performance and Results Act

(GPRA) of 1993 requires federal agencies, in consul-

tation with Congress and outside stakeholders, to

prepare a strategic plan covering a multiyear period.

GPRA also requires each agency to submit an annual

performance plan and an annual performance report.

The GPRA Modernization Act of 2010 further

refines those requirements to include quarterly per-

for mance reporting. Although the Board is not cov-

ered by GPRA, the Board follows the spirit of the act

and, like other federal agencies, prepares an annual

performance plan and an annual performance report.

Strategic Framework, Performance Plan,

and Performance Report

The Board’s 2012–15 Strategic Framework (frame-

work) articulates the Board’s mission within the con-

text of resources required to meet Dodd-Frank Act

mandates, close cross-disciplinary knowledge gaps,

develop appropriate policy, and continue addressing

the recovery of a fragile global economy. The frame-

work sets forth major goals, outlines strategies for

achieving those goals, and identifies key measures of

performance toward achieving the strategic

objectives.

The annual performance plan outlines the planned

projects, initiatives, and activities that support the

framework’s long-term objectives and resources nec-

essary to achieve those objectives. The annual perfor-

mance report summarizes the Board’s accomplish-

ments that contributed toward achieving the strategic

goals and objectives identified in the framework.

The framework, performance plan, and performance

report are available on the Board’s website at

www

.federalreserve.gov/publications/gpra/files/2012-2015-

strategic-framework.pdf

, www.federalreserve.gov/

publications/gpra/files/2014-gpra-performance-plan

.pdf

, and www.federalreserve.gov/publications/gpra/

files/2013-gpra-performance-report.pdf

Other Federal Reserve Operations 119

Record of Policy Actions

of the Board of Governors

Policy actions of the Board of Governors are pre-

sented pursuant to section 10 of the Federal Reserve

Act. That section provides that the Board shall keep

a record of all questions of policy determined by the

Board and shall include in its annual report to Con-

gress a full account of such actions. This chapter pro-

vides a summary of policy actions in 2014, as imple-

mented through (1) rules and regulations, (2) policy

statements and other actions, and (3) discount rates

for depository institutions. Policy actions were

approved by all Board members in office, unless indi-

cated otherwise.

More information on the actions is

available from the relevant Federal Register notices or

other documents (see links in footnotes) or on

request from the Board’s Freedom of Information

Office.

For information on the Federal Open Market Com-

mittee’s policy actions relating to open market opera-

tions, see

section 9, “Minutes of Federal Open Mar-

ket Committee Meetings.”

Rules and Regulations

Regulation H (Membership of State

Banking Institutions in the Federal

Reserve System) and Regulation Q

(Capital Adequacy of Bank Holding

Companies, Savings and Loan Holding

Companies, and State Member Banks)

On April 8, 2014, the Board approved a final rule

(Docket No. R-1460) to strengthen the supplemen-

tary leverage ratio standards for large, interconnected

U.S. banking organizations. The rule was published

jointly with the Federal Deposit Insurance Corpora-

tion and Office of the Comptroller of the Currency.

The final rule applies to any U.S. top-tier bank hold-

ing company with more than $700 billion in total

consolidated assets or more than $10 trillion in assets

under custody (covered bank holding companies)

and to its insured depository institution subsidiaries.

Currently, eight large U.S. banking organizations

meet the asset threshold to be considered covered

bank holding companies. Under the rule, covered

bank holding companies must maintain a leverage

buffer greater than 2 percentage points above the

minimum supplementary leverage ratio requirement

of 3 percent, for a total of more than 5 percent, to

avoid restrictions on capital distributions and discre-

tionary bonus payments. Insured depository institu-

tion subsidiaries of covered bank holding companies

must maintain at least a 6 percent supplementary

leverage ratio to be considered “well capitalized”

under the agencies’ prompt corrective action frame-

work. The final rule is effective January 1, 2018.

Voting for this action: Chair Yellen and Gover-

nors Tarullo, Stein, and Powell.

Regulation Q (Capital Adequacy of Bank

Holding Companies, Savings and Loan

Holding Companies, and State Member

Banks)

On July 14, 2014, the Board approved a final rule

(Docket No. R-1488) to revise the definition of “eli-

gible guarantee” to remove the requirement that this

type of guarantee be made by an eligible guarantor

for purposes of calculating a banking organization’s

regulatory capital under the advanced approaches

risk-based capital rule.

Banking organizations use

eligible guarantees to reduce the credit risk of certain

exposures. The final rule, published jointly with the

Federal Deposit Insurance Corporation and Office of

Chairman Bernanke’s term expired on January 31, and Vice

Chair Yellen took office as Chair on February 3, 2014. Gover-

nor Raskin resigned on March 13, and Governor Stein resigned

on May 28, 2014. Governor Fischer joined the Board on

May 28 and took office as Vice Chairman on June 16, 2014.

Governor Brainard joined the Board on June 16, 2014.

See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2014-

05-01/html/2014-09367.htm

See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2014-

07-30/html/2014-17858.htm

121

the Comptroller of the Currency, is effective Octo-

ber 1, 2014.

Voting for this action: Chair Yellen, Vice Chair-

man Fischer, and Governors Tarullo, Powell,

and Brainard.

On September 3, 2014, the Board approved a final

rule (Docket No. R-1487) to revise the definition of

total leverage exposure used in the calculation of the

supplementary leverage ratio in the agencies’ 2013

revised capital rule.

The final rule modifies the meth-

odology for including off-balance-sheet items, such as

credit derivatives, repo-style transactions, and lines of

credit, in the denominator of the supplementary

leverage ratio to more appropriately capture a bank-

ing organization’s on- and off-balance-sheet expo-

sures. The revised supplementary leverage ratio

applies to all banking organizations subject to the

advanced approaches risk-based capital rule. The

final rule, published jointly with the Federal Deposit

Insurance Corporation and Office of the Comptrol-

ler of the Currency, is effective January 1, 2015.

Voting for this action: Chair Yellen, Vice Chair-

man Fischer, and Governors Tarullo, Powell,

and Brainard.

Regulation Q (Capital Adequacy of Bank

Holding Companies, Savings and Loan

Holding Companies, and State Member

Banks) and Regulation WW (Liquidity Risk

Measurement Standards)

On December 15, 2014, the Board approved an

interim final rule (Docket No. R-1507) revising the

definition of “qualifying master netting agreement”

and related definitions in the regulatory capital and

the liquidity coverage ratio rules.

The changes are

designed to ensure that the regulatory capital and

liquidity treatment of certain financial transactions is

not affected by the implementation of special resolu-

tion regimes in foreign jurisdictions or by contractual

provisions that incorporate stays of special resolution

regimes. The interim final rule, published jointly with

the Office of the Comptroller of the Currency, is

effective January 1, 2015. (Note: The Federal Deposit

Insurance Corporation issued a separately published

notice of proposed rulemaking with the same

modifications.)

Voting for this action: Chair Yellen, Vice Chair-

man Fischer, and Governors Tarullo, Powell,

and Brainard.

Regulation Y (Bank Holding Companies

and Change in Bank Control) and

Regulation YY (Enhanced Prudential

Standards)

On February 20, 2014, the Board approved a final

rule (Docket Nos. R-1463 and R-1464) revising the

capital plan and stress testing rules to defer until

October 1, 2015, use of the advanced approaches

framework in the Board’s capital plan and stress test-

ing rules.

In addition, the Board and Office of the

Comptroller of the Currency permitted eight bank-

ing organizations to begin using the advanced

approaches framework to determine their risk-based

capital requirements. Except for the advanced

approaches deferral, the final rule also maintains all

the changes to the Board’s capital plan rule and

stress testing rules contained in two interim final

rules issued in September 2013. The f inal rule is effec-

tive April 15, 2014.

Voting for this action: Chair Yellen and Gover-

nors Tarullo, Raskin, Stein, and Powell.

On October 16, 2014, the Board approved a final rule

(Docket No. R-1492) revising the capital plan and

stress testing rules to adjust the timeframe for annual

submissions of capital plans and for the conduct of

company-run and supervisory stress tests.

For the

2015 capital plan cycle, bank holding companies with

total consolidated assets of $50 billion or more are

required to submit capital plans on or before Janu-

ary 5, 2015, which is unchanged from prior years. For

subsequent cycles, beginning in 2016, participating

bank holding companies will be required to submit

their capital plans and stress testing results to the

Federal Reserve on or before April 5. The final rule

also includes other modifications to the capital plan

and stress testing rules, including a limitation on the

ability of a bank holding company with $50 billion

or more in total consolidated assets to make capital

distributions under the capital plan rule if the bank

See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2014-

09-26/html/2014-22083.htm

See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2014-

12-30/html/2014-30218.htm

See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2014-

03-11/html/2014-05053.htm

See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2014-

10-27/html/2014-25170.htm

122 101st Annual Report | 2014

holding company’s net capital issuances are less than

the amount indicated in its capital plan. The final

rule is effective November 26, 2014, except for the

limit on net capital distributions, which is effective on

April 1, 2015.

Voting for this action: Chair Yellen, Vice Chair-

man Fischer, and Governors Tarullo, Powell,

and Brainard.

Regulation DD (Truth in Savings),

Regulation P (Privacy of Consumer

Information), and Regulation V

(Fair Credit Reporting)

On May 20, 2014, the Board approved final rules

(Docket Nos. R-1482 and R-1483) to repeal Regula-

tions DD and P, in accordance with the transfer of

rulemaking authority for a number of consumer pro-

tection laws to the Consumer Financial Protection

Bureau (CFPB) under the Dodd-Frank Act.

The

CFPB has issued interim final rules that are substan-

tially identical to those regulations. While the Board

retains authority to issue rules for certain motor

vehicle dealers, there is no evidence that any motor

vehicle dealers subject to the Board’s jurisdiction

engage in activities covered by the Truth in Savings

Act. Furthermore, pursuant to the Dodd-Frank Act,

entities supervised by the Board that were previously

covered by the Board’s Regulation P are now subject

to the privacy rules issued by the CFPB. In addition,

the Board amended (Docket No. R-1484) Regula-

tion V to reflect changes to the Fair Credit Reporting

Act that limit the application of the Identity Theft

Red Flags rule to only certain creditors.

The final

rules are effective June 30, 2014.

Voting for this action: Chair Yellen and Gover-

nors Tarullo, Stein, and Powell.

Regulation HH (Designated Financial

Market Utilities) and Federal Reserve

Policy on Payment System Risk

On October 24, 2014, the Board approved final

amendments to Regulation HH (Docket No. R-1477)

regarding the risk-management standards for finan-

cial market utilities that have been designated as sys-

temically important by the Financial Stability Over-

sight Council and for which the Board has standard-

setting authority under the Dodd-Frank Act.

The

Board also approved revisions to part I of the Fed-

eral Reserve Policy on Payment System Risk (Docket

No. OP-1478), which applies to financial market

infrastructures more generally, including those oper-

ated by the Federal Reserve Banks.

The amend-

ments and revisions are based on 2012 international

risk-management standards for financial market

infrastructures. Key amendments and revisions

include separate standards to address credit risk and

liquidity risk, new requirements on recovery and

orderly wind-down planning, a new standard on gen-

eral business risk, a new standard on tiered participa-

tion arrangements, and heightened requirements on

transparency and disclosure. The amendments and

revisions are effective on December 31, 2014, except

several of the new requirements have a later compli-

ance date, as described in the Federal Register

notices.

Voting for this action: Chair Yellen, Vice Chair-

man Fischer, and Governors Tarullo, Powell,

and Brainard.

Regulation RR (Credit Risk Retention)

On October 22, 2014, the Board approved a final rule

(Docket No. R-1411) to implement the credit risk

retention requirements in the Dodd-Frank Act.

The final rule generally requires the sponsors of

securitization transactions to retain not less than

5 percent of the credit risk of the assets they securi-

tize. The rule also includes prohibitions on transfer-

ring or hedging the retained credit risk. The f inal rule

provides exemptions for asset-backed securities that

are collateralized exclusively by residential mortgages

that qualify as qualified residential mortgages

(QRMs). Under the rule, the QRM definition is

aligned with that of a “qualified mortgage,” as

adopted by the Consumer Financial Protection

Bureau. Exemptions are also available for certain

other types of residential mortgage securitizations,

including those guaranteed or insured by agencies of

the U.S. government and those originated by state

housing finance agencies. In addition, the final rule

does not require risk retention for securitizations of

commercial loans, commercial mortgages, or auto-

See Federal Register notices at www.gpo.gov/fdsys/pkg/FR-

2014-05-29/html/2014-12356.htm

and www.gpo.gov/fdsys/pkg/

FR-2014-05-29/html/2014-12357.htm

See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2014-

05-29/html/2014-12358.htm

See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2014-

11-05/html/2014-26090.htm

See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2014-

11-13/html/2014-26791.htm

See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2014-

12-24/html/2014-29256.htm

Record of Policy Actions of the Board of Governors 123

mobile loans, provided that the transactions meet

specific standards for high-quality underwriting. The

final rule was also approved by the Federal Deposit

Insurance Corporation, Office of the Comptroller of

the Currency, Federal Housing Finance Agency,

Securities and Exchange Commission, and Depart-

ment of Housing and Urban Development. The

implementing agencies have agreed to review the

QRM definition and its effect on the residential

mortgage market no later than four years after the

rule’s effective date and periodically thereafter. The

final rule is effective February 23, 2015, with compli-

ance dates of December 24, 2015, for asset-backed

securities collateralized by residential mortgages and

December 24, 2016, for other types of asset-backed

securities.

Voting for this action: Chair Yellen, Vice Chair-

man Fischer, and Governors Tarullo, Powell,

and Brainard.

Regulation VV (Proprietary Trading and

Certain Interests in and Relationships with

Covered Funds)

On January 14, 2014, the Board approved an interim

final rule (Docket No. R-1480) permitting banking

entities to retain interests in, and act as sponsors to,

certain collateralized debt obligations backed primar-

ily by trust preferred securities that meet the defini-

tion of covered funds, as permitted under the grand-

fathering provisions for certain trust preferred securi-

ties in the Dodd-Frank Act.

The interim final rule,

a companion rule to the so-called Volcker rule

approved in December 2013, establishes specific

qualifications for the type of covered funds that may

be retained. The interim final rule was published

jointly with the Federal Deposit Insurance Corpora-

tion, Office of the Comptroller of the Currency,

Commodity Futures Trading Commission, and Secu-

rities and Exchange Commission, and is effective

April 1, 2014.

Voting for this action: Chairman Bernanke, Vice

Chair Yellen, and Governors Tarullo, Raskin,

Stein, and Powell.

Note: On April 3, 2014, the Board approved a state-

ment that it stands ready to grant banking entities

covered by the Volcker rule two additional one-year

extensions (which together would be until July 21,

2017) to conform their investments in and sponsor-

ship of certain collateralized loan obligations that

were in place before December 31, 2013, and are con-

sidered to be covered funds under section 13 of the

Bank Holding Company Act.

On December 17,

2014, the Board approved an extension, until July 21,

2016, for banking entities to conform their invest-

ments in and relationships with covered funds and

foreign funds that were in place before December 31,

2013 (legacy covered funds) with the requirements of

the Volcker rule.

The Board also announced its

intention to act next year to extend the conformance

period for legacy covered funds for one additional

year, until July 21, 2017.

Regulation WW (Liquidity Risk

Measurement Standards)

On September 3, 2014, the Board approved a final

rule (Docket No. R-1466) implementing the liquidity

coverage ratio (LCR), a quantitative liquidity

requirement for large and internationally active

banking organizations.

The LCR is based on

liquidity standards promulgated under the Basel III

reform measures and also establishes an enhanced

prudential liquidity standard consistent with the

Dodd-Frank Act. Under the final rule, covered bank-

ing firms will be required to maintain a minimum

amount of high-quality liquid assets sufficient to

cover their net cash outflows over a 30-calendar-day

stress period. The rule applies a less stringent LCR

requirement to certain smaller depository institution

holding companies. In addition, the final rule does

not allow municipal securities to be designated as

high-quality liquid assets. The rule does not apply to

bank holding companies and savings and loan hold-

ing companies with less than $50 billion in total con-

solidated assets or to nonbank financial companies

designated as systemically important by the Financial

Stability Oversight Council (companies so designated

will have their liquidity requirements established

through a separate rule or order). The f inal rule, pub-

lished jointly with the Federal Deposit Insurance

Corporation and Office of the Comptroller of the

Currency, is effective January 1, 2015.

See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2014-

01-31/html/2014-02019.htm

See press release at www.federalreserve.gov/newsevents/press/

bcreg/20140407a.htm

See press release at www.federalreserve.gov/newsevents/press/

bcreg/20141218a.htm

See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2014-

10-10/html/2014-22520.htm

124 101st Annual Report | 2014

Voting for this action: Chair Yellen, Vice Chair-

man Fischer, and Governors Tarullo, Powell,

and Brainard.

Regulation XX (Concentration Limit)

On November 3, 2014, the Board approved a final

rule (Docket No. R-1489) to implement the Dodd-

Frank Act financial-sector concentration limit that

generally prohibits a financial company from merging

or consolidating with, or from acquiring, another

company if the resulting company’s liabilities would

exceed 10 percent of the aggregate liabilities of all

financial companies.

In addition, the final rule

establishes reporting requirements for financial com-

panies that do not otherwise report consolidated

financial information to the Board or another federal

banking agency, in accordance with the Bank Hold-

ing Company Act. The final rule is effective Janu-

ary 1, 2015.

Voting for this action: Chair Yellen, Vice Chair-

man Fischer, and Governors Tarullo, Powell,

and Brainard.

Regulation YY (Enhanced Prudential

Standards)

On February 18, 2014, the Board approved a final

rule (Docket No. R-1438) to implement enhanced

prudential standards under the Dodd-Frank Act for

bank holding companies and foreign banking organi-

zations with $50 billion or more in total consolidated

assets.

The enhanced prudential standards include

risk-based and leverage capital requirements, liquid-

ity standards, risk-management requirements, stress

testing requirements, and a debt-to-equity limit for

companies that the Financial Stability Oversight

Council has determined pose a grave threat to finan-

cial stability. Foreign banking organizations with U.S.

nonbranch assets of $50 billion or more are also

required to form a U.S. inter mediate holding com-

pany that will generally be subject to the same pru-

dential standards as U.S. bank holding companies,

including capital planning and stress testing require-

ments. The final rule is effective June 1, 2014.

Voting for this action: Chair Yellen and Gover-

nors Tarullo, Raskin, Stein, and Powell.

Policy Statements and Other Actions

Supervisory Guidance on Implementing

Dodd-Frank Act Company-Run Stress

Tests for Medium-Sized Institutions

On February 25, 2014, the Board approved final

guidance (Docket No. OP-1485), published jointly

with the Federal Deposit Insurance Corporation

(FDIC) and Office of the Comptroller of the Cur-

rency (OCC), describing supervisory expectations

and providing examples of sound practices for stress

tests conducted by financial institutions with between

$10 billion and $50 billion in total consolidated

assets.

These medium-sized companies are required

to conduct annual, company-run stress tests under

the agencies’ rules and the Dodd-Frank Act. Consis-

tent with the flexibility of these rules, the guidance

takes into account the different risk profiles, sizes,

business mixes, and levels of complexity in medium-

sized institutions. Further, the final guidance con-

firms that companies in the $10 billion to $50 billion

asset range are not subject to the Federal Reserve’s

capital plan rule, comprehensive capital analysis and

review, stress tests conducted by the supervisory

agencies, or related data collection requirements

applicable to bank holding companies with assets of

at least $50 billion. The Board’s guidance is effective

April 1, 2014, and final guidance from the FDIC and

OCC is effective March 31, 2014.

Voting for this action: Chair Yellen and Gover-

nors Tarullo, Raskin, Stein, and Powell.

Term Deposit Facility Testing

On May 1, 2014, the Board approved a series of eight

consecutive offerings through its Term Deposit Facil-

ity (TDF), with a gradually increasing individual

award cap for each auction of up to $10 billion and

an increase in offering rates of up to 5 basis points

over the interest rate on excess reserves.

The offer-

ings are part of the Board’s ongoing TDF test opera-

tions and are also intended to familiarize eligible

institutions with TDF procedures.

Voting for this action: Chair Yellen and Gover-

nors Tarullo, Stein, and Powell.

See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2014-

11-14/html/2014-26747.htm

See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2014-

03-27/html/2014-05699.htm

See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2014-

03-13/html/2014-05518.htm

See press release at www.federalreserve.gov/newsevents/press/

monetary/20140509a.htm

Record of Policy Actions of the Board of Governors 125

On August 18, 2014, the Board approved additional

changes to the terms of its TDF testing to authorize

(1) offerings of term deposits with an early with-

drawal feature that allows depository institutions to

obtain a return of funds before maturity, subject to

forfeiture of all interest on the withdrawn term

deposit plus an early withdrawal penalty, and (2) an

increase of up to $20 billion in the individual award

cap for TDF test operations.

Voting for this action: Chair Yellen, Vice Chair-

man Fischer, and Governors Tarullo, Powell,

and Brainard.

Addendum to the Interagency Policy

Statement on Income Tax Allocation in a

Holding Company Structure

On June 10, 2014, the Board approved a final adden-

dum (Docket No. OP-1474) to the Interagency Policy

Statement on Income Tax Allocation in a Holding

Company Structure to ensure that insured depository

institutions in a consolidated group maintain an

appropriate relationship regarding the payment of

taxes and treatment of tax refunds.

The addendum,

published jointly with the Federal Deposit Insurance

Corporation and Office of the Comptroller of the

Currency, supplements a 1998 policy statement on

income tax allocation by instructing insured deposi-

tory institutions and their holding companies to

review their tax allocation agreements in order to

confirm that the agreements expressly acknowledge

the holding company receives any tax refunds as an

agent for the insured depository institutions, consis-

tent with sections 23A and 23B of the Federal

Reserve Act. In addition, the addendum includes spe-

cific language that banking organizations could

include in their tax allocation agreements to facilitate

the agencies’ instructions. Institutions and holding

companies are expected to implement the addendum

not later than October 31, 2014.

Voting for this action: Chair Yellen, and Gover-

nors Tarullo, Powell, and Fischer.

Federal Reserve Policy on Payment

System Risk and Regulation J (Collection

of Checks and Other Items by Federal

Reserve Banks and Funds Transfers

through Fedwire)

On November 26, 2014, the Board approved revi-

sions to part II of the Federal Reserve Policy on Pay-

ment System Risk (PSR policy) (Docket No.

OP-1472) related to the procedures for posting debit

and credit entries to institutions’ accounts at Federal

Reserve Banks for automated clearinghouse (ACH)

debit and commercial check transactions.

The PSR

policy revisions also set principles for establishing

future posting rules for Reserve Banks’ same-day

ACH service, clarified the Reserve Banks’ adminis-

tration of the policy for U.S. branches and agencies

of foreign banking organizations, and made other

technical corrections. In addition, the Board

approved related amendments to Regulation J

(Docket No. R-1473) regarding the timing of when

paying banks must settle for the check transactions

presented to them by the Reserve Banks.

The revi-

sions are effective December 5, 2014, except for the

policy changes to the Board’s posting procedures for

ACH debit and commercial check transactions and

the related amendments to Regulation J, all of which

are effective July 23, 2015.

Voting for this action: Chair Yellen, Vice Chair-

man Fischer, and Governors Tarullo, Powell,

and Brainard.

Discount Rates for Depository

Institutions in 2014

Under the Federal Reserve Act, the boards of direc-

tors of the Federal Reserve Banks must establish

rates on discount window loans to depository institu-

tions at least every 14 days, subject to review and

determination by the Board of Governors.

See press release at www.federalreserve.gov/newsevents/press/

monetary/20140904a.htm

See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2014-

06-19/html/2014-14325.htm

See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2014-

12-05/html/2014-28664.htm

See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2014-

12-05/html/2014-28516.htm

A technical amendment to section 210.2(c) of Regulation J is

effective December 5, 2014.

126 101st Annual Report | 2014

Primary, Secondary, and Seasonal Credit

Primary credit, the Federal Reserve’s main lending

program for depository institutions, is extended at

the primary credit rate, which is set above the usual

level of short-term market interest rates. It is made

available, with minimal administration and for very

short terms, as a backup source of liquidity to

depository institutions that, in the judgment of the

lending Federal Reserve Bank, are in generally sound

financial condition. Throughout 2014, the primary

credit rate was ¾ percent.

Secondary credit is available in appropriate circum-

stances to depository institutions that do not qualify

for primary credit. The secondary credit rate is set at

a spread above the primary credit rate. Throughout

2014, the spread was set at 50 basis points resulting

in a secondary credit rate of 1¼ percent. Seasonal

credit is available to smaller depository institutions to

meet liquidity needs that arise from regular swings in

their loans and deposits. The rate on seasonal credit

is calculated every two weeks as an average of

selected money-market yields, typically resulting in a

rate close to the federal funds rate target. At year-

end, the seasonal credit rate was 0.15 percent.

Votes on Changes to Discount Rates for

Depository Institutions

About every two weeks during 2014, the Board

approved proposals by the 12 Reserve Banks to

maintain the formulas for computing the secondary

and seasonal credit rates. In 2014, the Board did not

approve any changes in the primary credit rate.

For current and historical discount rates, see www

.frbdiscountwindow.org/

Record of Policy Actions of the Board of Governors 127

Minutes of

Federal Open Market

Committee Meetings

The policy actions of the Federal Open Market Com-

mittee, contained in the minutes of its meetings, are

presented in the annual report of the Board of Gov-

ernors pursuant to the requirements of section 10 of

the Federal Reserve Act. That section provides that

the Board shall keep a complete record of the actions

taken by the Board and by the Federal Open Market

Committee on all questions of policy relating to open

market operations, that it shall record therein the

votes taken in connection with the determination of

open market policies and the reasons underlying each

policy action, and that it shall include in its annual

report to Congress a full account of such actions.

The minutes of the meetings contain the votes on the

policy decisions made at those meetings, as well as a

summary of the information and discussions that led

to the decisions. In addition, four times a year, start-

ing with the October 2007 Committee meeting, a

Summary of Economic Projections is published as an

addendum to the minutes. The descriptions of eco-

nomic and financial conditions in the minutes and the

Summary of Economic Projections are based solely

on the information that was available to the Commit-

tee at the time of the meetings.

Members of the Committee voting for a particular

action may differ among themselves as to the reasons

for their votes; in such cases, the range of their views

is noted in the minutes. When members dissent from

a decision, they are identified in the minutes and a

summary of the reasons for their dissent is provided.

Policy directives of the Federal Open Market Com-

mittee are issued to the Federal Reserve Bank of New

York as the Bank selected by the Committee to

execute transactions for the System Open Market

Account. In the area of domestic open market opera-

tions, the Federal Reserve Bank of New York oper-

ates under instructions from the Federal Open Mar-

ket Committee that take the form of an Authoriza-

tion for Domestic Open Market Operations and a

Domestic Policy Directive. (A new Domestic Policy

Directive is adopted at each regularly scheduled

meeting.) In the foreign currency area, the Federal

Reserve Bank of New York operates under an Autho-

rization for Foreign Currency Operations, a Foreign

Currency Directive, and Procedural Instructions with

Respect to Foreign Currency Operations. Changes in

the instruments during the year are reported in the

minutes for the individual meetings.

As of January 1, 2014, the Federal Reserve Bank of New York

was operating under the Domestic Policy Directive approved at

the December 17–18, 2013, Committee meeting. The other

policy instruments (the Authorization for Domestic Open Mar-

ket Operations, the Authorization for Foreign Currency Opera-

tions, the Foreign Currency Directive, and Procedural Instruc-

tions with Respect to Foreign Currency Operations) in effect as

of January 1, 2014, were approved at the January 29–30, 2013,

meeting.

129

Meeting Held on January 28–29, 2014

A meeting of the Federal Open Market Committee

was held in the offices of the Board of Governors of

the Federal Reserve System in Washington, D.C., on

Tuesday, January 28, 2014, at 2:00 p.m. and contin-

ued on Wednesday, January 29, 2014, at 9:00 a.m.

Present

Ben Bernanke

Chairman

William C. Dudley

Vice Chairman

Richard W. Fisher

Narayana Kocherlakota

Sandra Pianalto

Charles I. Plosser

Jerome H. Powell

Jeremy C. Stein

Daniel K. Tarullo

Janet L. Yellen

Christine Cumming, Charles L. Evans,

Jeffrey M. Lacker, Dennis P. Lockhart,

and John C. Williams

Alternate Members of the Federal Open Market

Committee

James Bullard, Esther L. George,

and Eric Rosengren

Presidents of the Federal Reserve Banks of St. Louis,

Kansas City, and Boston, respectively

William B. English

Secretary and Economist

Matthew M. Luecke

Deputy Secretary

Michelle A. Smith

Assistant Secretary

Scott G. Alvarez

General Counsel

Thomas C. Baxter

Deputy General Counsel

Steven B. Kamin

Economist

David W. Wilcox

Economist

James A. Clouse, Thomas A. Connors,

Evan F. Koenig, Thomas Laubach,

Michael P. Leahy, Loretta J. Mester,

Paolo A. Pesenti, Samuel Schulhofer-Wohl,

Mark E. Schweitzer, and William Wascher

Associate Economists

Simon Potter

Manager, System Open Market Account

Lorie K. Logan

Deputy Manager, System Open Market Account

Michael S. Gibson

Director, Division of Banking Supervision and

Regulation, Board of Governors

Nellie Liang

Director, Office of Financial Stability Policy and

Research, Board of Governors

Stephen A. Meyer and William Nelson

Deputy Directors, Division of Monetary Affairs,

Board of Governors

Jon W. Faust

Special Adviser to the Board, Office of Board

Members, Board of Governors

Linda Robertson and David W. Skidmore

Assistants to the Board, Office of Board Members,

Board of Governors

Trevor A. Reeve

Senior Associate Director, Division of International

Finance, Board of Governors

Joyce K. Zickler

Senior Adviser, Division of Monetary Affairs,

Board of Governors

Daniel M. Covitz and Michael T. Kiley

Associate Directors, Division of Research and

Statistics, Board of Governors

Jane E. Ihrig

Deputy Associate Director, Division of Monetary

Affairs, Board of Governors

Edward Nelson

Assistant Director, Division of Monetary Affairs,

Board of Governors

John J. Stevens

Assistant Director, Division of Research and

Statistics, Board of Governors

Jeremy B. Rudd

Adviser, Division of Research and Statistics,

Board of Governors

130 101st Annual Report | 2014

Dana L. Burnett

Section Chief, Division of Monetary Affairs,

Board of Governors

Burcu Duygan-Bump

Senior Project Manager, Division of Monetary

Affairs, Board of Governors

David H. Small

Project Manager, Division of Monetary Affairs,

Board of Governors

Andrew Figura

Group Manager, Division of Research and Statistics,

Board of Governors

Michele Cavallo

Senior Economist, Division of International Finance,

Board of Governors

Yuriy Kitsul

Economist, Division of Monetary Affairs,

Board of Governors

Randall A. Williams

Records Project Manager, Division of Monetary

Affairs, Board of Governors

Kenneth C. Montgomery

First Vice President, Federal Reserve Bank of Boston

David Altig, Glenn D. Rudebusch,

and Daniel G. Sullivan

Executive Vice Presidents, Federal Reserve Banks of

Atlanta, San Francisco, and Chicago, respectively

Troy Davig, Geoffrey Tootell,

and Christopher J. Waller

Senior Vice Presidents, Federal Reserve Banks of

Kansas City, Boston, and St. Louis, respectively

Robert L. Hetzel

Senior Economist, Federal Reserve Bank of

Richmond

Annual Organizational Matters

In the agenda for this meeting, it was reported that

advices of the election of the following members and

alternate members of the Federal Open Market Com-

mittee (the “Committee”) for a term beginning Janu-

ary 28, 2014, had been received and that these indi-

viduals had executed their oaths of office.

The elected members and alternate members were as

follows:

William C. Dudley

President of the Federal Reserve Bank of New York,

with

Christine Cumming

First Vice President of the Federal Reserve Bank of

New York, as alternate.

Charles I. Plosser

President of the Federal Reserve Bank of

Philadelphia, with

Jeffrey M. Lacker

President of the Federal Reserve Bank of Richmond,

as alternate.

Sandra Pianalto

President of the Federal Reserve Bank of Cleveland,

with

Charles L. Evans

President of the Federal Reserve Bank of Chicago, as

alternate.

Richard W. Fisher

President of the Federal Reserve Bank of Dallas,

with

Dennis P. Lockhart

President of the Federal Reserve Bank of Atlanta, as

alternate.

Narayana Kocherlakota

President of the Federal Reserve Bank of

Minneapolis, with

John C. Williams

President of the Federal Reserve Bank of

San Francisco, as alternate.

By unanimous vote, the Committee selected Ben Ber-

nanke to serve as Chairman through January 31,

2014, and Janet L. Yellen to serve as Chairman, effec-

tive February 1, 2014, until the selection of her suc-

cessor at the first regularly scheduled meeting of the

Committee in 2015.

By unanimous vote, the following officers of the

Committee were selected to serve until the selection

of their successors at the first regularly scheduled

meeting of the Committee in 2015:

William C. Dudley

Vice Chairman

William B. English

Secretary and Economist

Matthew M. Luecke

Deputy Secretary

Versions of the current Committee documents are available at

www.federalreserve.gov/monetarypolicy/rules_authorizations

.htm

Minutes of Federal Open Market Committee Meetings | January 131

Michelle A. Smith

Assistant Secretary

Scott G. Alvarez

General Counsel

Thomas C. Baxter

Deputy General Counsel

Richard M. Ashton

Assistant General Counsel

Steven B. Kamin

Economist

David W. Wilcox

Economist

James A. Clouse

Thomas A. Connors

Evan F. Koenig

Thomas Laubach

Michael P. Leahy

Loretta J. Mester

Paolo A. Pesenti

Samuel Schulhofer-Wohl

Mark E. Schweitzer

William Wascher

Associate Economists

By unanimous vote, the Federal Reserve Bank of

New York was selected to execute transactions for

the System Open Market Account.

By unanimous vote, the Authorization for Domestic

Open Market Operations was approved with an

amendment that makes the structure of paragraphs

1.A and 1.B more similar. The Guidelines for the

Conduct of System Open Market Operations in

Federal-Agency Issues remained suspended.

Authorization for Domestic Open Market

Operations (As Amended Effective

January 28, 2014)

The Federal Open Market Committee authorizes

and directs the Federal Reserve Bank of New

York, to the extent necessary to carry out the

most recent domestic policy directive adopted at

a meeting of the Committee:

To buy or sell in the open market U.S. gov-

ernment securities, including securities of the

Federal Financing Bank, and securities that

are direct obligations of, or fully guaranteed

as to principal and interest by, any agency of

the United States, from or to securities deal-

ers and foreign and international accounts

maintained at the Federal Reserve Bank of

New York, on a cash, regular, or deferred

delivery basis, for the System Open Market

Account at market prices, and, for such

Account, to exchange maturing U.S. govern-

ment and federal agency securities with the

Treasury or the individual agencies or to

allow them to mature without replace-

ment; and

B. To buy or sell in the open market U.S. gov-

ernment securities, and securities that are

direct obligations of, or fully guaranteed as to

principal and interest by, any agency of the

United States, for the System Open Market

Account under agreements to resell or repur-

chase such securities or obligations (including

such transactions as are commonly referred

to as repo and reverse repo transactions) in

65 business days or less, at rates that, unless

otherwise expressly authorized by the Com-

mittee, shall be determined by competitive

bidding, after applying reasonable limitations

on the volume of agreements with individual

counterparties.

2. The Federal Open Market Committee authorizes

the Federal Reserve Bank of New York to under-

take transactions of the type described in para-

graphs 1.A and 1.B from time to time for the pur-

pose of testing operational readiness. The aggre-

gate par value of such transactions of the type

described in paragraph 1.A shall not exceed

$5 billion per calendar year. The outstanding

amount of such transactions of the type

described in paragraph 1.B shall not exceed

$5 billion at any given time. These transactions

shall be conducted with prior notice to the

Committee.

3. In order to ensure the effective conduct of open

market operations, the Federal Open Market

Committee authorizes the Federal Reserve Bank

of New York to use agents in agency MBS-related

transactions.

4. In order to ensure the effective conduct of open

market operations, the Federal Open Market

Committee authorizes the Federal Reserve Bank

of New York to lend on an overnight basis U.S.

132 101st Annual Report | 2014

government securities and securities that are

direct obligations of any agency of the United

States, held in the System Open Market Account,

to dealers at rates that shall be determined by

competitive bidding. The Federal Reserve Bank

of New York shall set a minimum lending fee

consistent with the objectives of the program and

apply reasonable limitations on the total amount

of a specific issue that may be auctioned and on

the amount of securities that each dealer may

borrow. The Federal Reserve Bank of New York

may reject bids that could facilitate a dealer’s abil-

ity to control a single issue as determined solely

by the Federal Reserve Bank of New York. The

Federal Reserve Bank of New York may lend

securities on longer than an overnight basis to

accommodate weekend, holiday, and similar trad-

ing conventions.

5. In order to ensure the effective conduct of open

market operations, while assisting in the provision

of short-term investments or other authorized

services for foreign and international accounts

maintained at the Federal Reserve Bank of New

York and accounts maintained at the Federal

Reserve Bank of New York as fiscal agent of the

United States pursuant to section 15 of the Fed-

eral Reserve Act, the Federal Open Market Com-

mittee authorizes and directs the Federal Reserve

Bank of New York:

A. For the System Open Market Account, to sell

U.S. government securities and securities that

are direct obligations of, or fully guaranteed

as to principal and interest by, any agency of

the United States to such accounts on the

bases set forth in paragraph 1.A under agree-

ments providing for the resale by such

accounts of those securities in 65 business

days or less on terms comparable to those

available on such transactions in the market;

B. For the New York Bank account, when

appropriate, to undertake with dealers, sub-

ject to the conditions imposed on purchases

and sales of securities in paragraph l.B,

repurchase agreements in U.S. government

securities and securities that are direct obliga-

tions of, or fully guaranteed as to principal

and interest by, any agency of the United

States, and to arrange corresponding sale and

repurchase agreements between its own

account and such foreign, international, and

fiscal agency accounts maintained at the Fed-

eral Reserve Bank; and

For the New York Bank account, when

appropriate, to buy U.S. government securi-

ties and obligations that are direct obligations

of, or fully guaranteed as to principal and

interest by, any agency of the United States

from such foreign and international accounts

maintained at the Federal Reserve Bank

under agreements providing for the repur-

chase by such accounts of those securities on

the same business day.

Transactions undertaken with such accounts

under the provisions of this paragraph may pro-

vide for a service fee when appropriate.

In the execution of the Committee’s decision

regarding policy during any intermeeting period,

the Committee authorizes and directs the Federal

Reserve Bank of New York, upon the instruction

of the Chairman of the Committee, to (i) adjust

somewhat in exceptional circumstances the degree

of pressure on reserve positions and hence the

intended federal funds rate and to take actions

that result in material changes in the composition

and size of the assets in the System Open Market

Account other than those anticipated by the

Committee at its most recent meeting or

(ii) undertake transactions of the type described

in paragraphs 1.A and 1.B in order to appropri-

ately address temporary disruptions of an opera-

tional or highly unusual nature in U.S. dollar

funding markets. Any such adjustment as

described in clause (i) shall be made in the context

of the Committee’s discussion and decision at its

most recent meeting and the Committee’s long-

run objectives to foster maximum employment

and price stability, and shall be based on eco-

nomic, financial, and monetary developments

during the intermeeting period. Consistent with

Committee practice, the Chairman, if feasible,

will consult with the Committee before making

any instruction under this paragraph.

The Committee voted unanimously to amend the

Authorization for Foreign Currency Operations, the

Foreign Currency Directive, and the Procedural

Instructions with Respect to Foreign Currency

Operations in the form shown below. The approval of

these documents included approval of the System’s

warehousing agreement with the U.S. Treasury. These

Minutes of Federal Open Market Committee Meetings | January 133

documents were modified to incorporate the dollar

and foreign currency liquidity swap arrangements

authorized by a resolution on October 29, 2013.

Changes were made to the Authorization for Foreign

Currency Operations and the Procedural Instructions

with Respect to Foreign Currency Operations to

align the treatment of the liquidity swap arrange-

ments and that of the reciprocal currency arrange-

ments that have been in place with the central banks

of Mexico and Canada since 1994 as part of the

North American Framework Agreement. The Autho-

rization for Foreign Currency Operations was

amended to remove language regarding the transmis-

sion of pertinent information on System foreign cur-

rency operations to appropriate officials of the Treas-

ury Department because this language duplicated

language in the Program for Security of FOMC

Information.

Authorization for Foreign Currency Operations

(As Amended Effective January 28, 2014)

The Federal Open Market Committee authorizes

and directs the Federal Reserve Bank of New

York, for the System Open Market Account, to

the extent necessary to carry out the Committee’s

foreign currency directive and express authoriza-

tions by the Committee pursuant thereto, and in

conformity with such procedural instructions as

the Committee may issue from time to time:

To purchase and sell the following foreign

currencies in the form of cable transfers

through spot or forward transactions on the

open market at home and abroad, including

transactions with the U.S. Treasury, with the

U.S. Exchange Stabilization Fund established

by section 10 of the Gold Reserve Act of

1934, with foreign monetary authorities, with

the Bank for International Settlements, and

with other international financial institutions:

Australian dollars

Brazilian reais

Canadian dollars

Danish kroner

euro

Japanese yen

Korean won

Mexican pesos

New Zealand dollars

Norwegian kroner

Pounds sterling

Singapore dollars

Swedish kronor

Swiss francs

To hold balances of, and to have outstanding

forward contracts to receive or to deliver, the

foreign currencies listed in paragraph A

above.

To draw foreign currencies and to permit for-

eign banks to draw dollars under the

arrangements listed in paragraph 2 below, in

accordance with the Procedural Instructions

with Respect to Foreign Currency

Operations.

To maintain an overall open position in all

foreign currencies not exceeding $25.0 billion.

For this purpose, the overall open position in

all foreign currencies is defined as the sum

(disregarding signs) of net positions in indi-

vidual currencies, excluding changes in dollar

value due to foreign exchange rate move-

ments and interest accruals. The net position

in a single foreign currency is defined as

holdings of balances in that currency, plus

outstanding contracts for future receipt,

minus outstanding contracts for future deliv-

ery of that currency, i.e., as the sum of these

elements with due regard to sign.

The Federal Open Market Committee directs the

Federal Reserve Bank of New York to maintain

for the System Open Market Account (subject to

the requirements of section 214.5 of Regula-

tion N, Relations with Foreign Banks and

Bankers):

Reciprocal currency arrangements with the

following foreign banks:

Standing dollar liquidity swap arrangements

with the following foreign banks:

Bank of Canada

Bank of England

Bank of Japan

European Central Bank

Swiss National Bank

Foreign bank

Amount of arrangement

(millions of dollars equivalent)

Bank of Canada 2,000

Bank of Mexico 3,000

134 101st Annual Report | 2014

Standing foreign currency liquidity swap

arrangements with the following foreign

banks:

Bank of Canada

Bank of England

Bank of Japan

European Central Bank

Swiss National Bank

Dollar and foreign currency liquidity swap

arrangements have no pre-set size limits. Any

new swap arrangements shall be referred for

review and approval to the Committee. All

swap arrangements are subject to annual

review and approval by the Committee.

All transactions in foreign currencies undertaken

under paragraph 1.A above shall, unless other-

wise expressly authorized by the Committee, be at

prevailing market rates. For the purpose of pro-

viding an investment return on System holdings

of foreign currencies or for the purpose of adjust-

ing interest rates paid or received in connection

with swap drawings, transactions with foreign

central banks may be undertaken at non-market

exchange rates.

It shall be the normal practice to arrange with

foreign central banks for the coordination of for-

eign currency transactions. In making operating

arrangements with foreign central banks on

System holdings of foreign currencies, the Federal

Reserve Bank of New York shall not commit

itself to maintain any specific balance, unless

authorized by the Federal Open Market Commit-

tee. Any agreements or understandings concern-

ing the administration of the accounts main-

tained by the Federal Reserve Bank of New York

with the foreign banks designated by the Board of

Governors under section 214.5 of Regulation N

shall be referred for review and approval to the

Committee.

Foreign currency holdings shall be invested to

ensure that adequate liquidity is maintained to

meet anticipated needs and so that each currency

portfolio shall generally have an average duration

of no more than 18 months (calculated as

Macaulay duration). Such investments may

include buying or selling outright obligations of,

or fully guaranteed as to principal and interest by,

a foreign government or agency thereof; buying

such securities under agreements for repurchase

of such securities; selling such securities under

agreements for the resale of such securities; and

holding various time and other deposit accounts

at foreign institutions. In addition, when appro-

priate in connection with arrangements to pro-

vide investment facilities for foreign currency

holdings, U.S. government securities may be pur-

chased from foreign central banks under agree-

ments for repurchase of such securities within 30

calendar days.

6. All operations undertaken pursuant to the pre-

ceding paragraphs shall be reported promptly to

the Foreign Currency Subcommittee and the

Committee. The Foreign Currency Subcommittee

consists of the Chairman and Vice Chairman of

the Committee, the Vice Chairman of the Board

of Governors, and such other member of the

Board as the Chairman may designate (or in the

absence of members of the Board serving on the

Subcommittee, other Board members designated

by the Chairman as alternates, and in the absence

of the Vice Chairman of the Committee, the Vice

Chairman’s alternate). Meetings of the Subcom-

mittee shall be called at the request of any mem-

ber, or at the request of the manager, System

Open Market Account (“manager”), for the pur-

poses of reviewing recent or contemplated opera-

tions and of consulting with the manager on

other matters relating to the manager’s responsi-

bilities. At the request of any member of the Sub-

committee, questions arising from such reviews

and consultations shall be referred for determina-

tion to the Federal Open Market Committee.

7. The Chairman is authorized:

A. With the approval of the Committee, to enter

into any needed agreement or understanding

with the Secretary of the Treasury about the

division of responsibility for foreign currency

operations between the System and the

Treasury;

B. To keep the Secretary of the Treasury fully

advised concerning System foreign currency

operations, and to consult with the Secretary

on policy matters relating to foreign currency

operations;

C. From time to time, to transmit appropriate

reports and information to the National

Advisory Council on International Monetary

and Financial Policies.

Minutes of Federal Open Market Committee Meetings | January 135

All Federal Reserve Banks shall participate in the

foreign currency operations for System Account

in accordance with paragraph 3G(1) of the Board

of Governors’ Statement of Procedure with

Respect to Foreign Relationships of Federal

Reserve Banks dated January 1, 1944.

The Federal Open Market Committee authorizes

the Federal Reserve Bank of New York to under-

take transactions of the type described in para-

graphs 1, 2, and 5, and foreign exchange and

investment transactions that it may be otherwise

authorized to undertake from time to time for the

purpose of testing operational readiness. The

aggregate amount of such transactions shall not

exceed $2.5 billion per calendar year. These trans-

actions shall be conducted with prior notice to

the Committee.

Foreign Currency Directive (As Amended

Effective January 28, 2014)

System operations in foreign currencies shall gen-

erally be directed at countering disorderly market

conditions, provided that market exchange rates

for the U.S. dollar reflect actions and behavior

consistent with IMF Article IV, Section 1.

To achieve this end the System shall:

Undertake spot and forward purchases and

sales of foreign exchange.

Maintain reciprocal currency arrangements

with foreign central banks in accordance with

the Authorization for Foreign Currency

Operations.

Maintain standing dollar liquidity swap

arrangements with foreign banks in accor-

dance with the Authorization for Foreign

Currency Operations.

Maintain standing foreign currency liquidity

swap arrangements with foreign banks in

accordance with the Authorization for For-

eign Currency Operations.

Cooperate in other respects with central

banks of other countries and with interna-

tional monetary institutions.

Transactions may also be undertaken:

To adjust System balances in light of prob-

able future needs for currencies.

To provide means for meeting System and

Treasury commitments in particular curren-

cies, and to facilitate operations of the

Exchange Stabilization Fund.

For such other purposes as may be expressly

authorized by the Committee.

System foreign currency operations shall be

conducted:

In close and continuous consultation and

cooperation with the United States Treasury;

In cooperation, as appropriate, with foreign

monetary authorities; and

In a manner consistent with the obligations

of the United States in the International

Monetary Fund regarding exchange arrange-

ments under IMF Article IV.

Procedural Instructions with Respect to

Foreign Currency Operations (As Amended

Effective January 28, 2014)

In conducting operations pursuant to the authoriza-

tion and direction of the Federal Open Market Com-

mittee (the “Committee”) as set forth in the Authori-

zation for Foreign Currency Operations and the For-

eign Currency Directive, the Federal Reserve Bank of

New York, through the manager, System Open Mar-

ket Account (“manager”), shall be guided by the fol-

lowing procedural understandings with respect to

consultations and clearances with the Committee, the

Foreign Currency Subcommittee (the “Subcommit-

tee”), and the Chairman of the Committee, unless

otherwise directed by the Committee. All operations

undertaken pursuant to such clearances shall be

reported promptly to the Committee.

For the reciprocal currency arrangements author-

ized in paragraphs 2.A of the Authorization for

Foreign Currency Operations:

Drawings must be approved by the Subcom-

mittee (or by the Chairman, if the Chairman

believes that consultation with the Subcom-

mittee is not feasible in the time available) if

the swap drawing proposed by a foreign bank

does not exceed the larger of (i) $200 million

136 101st Annual Report | 2014

or (ii) 15 percent of the size of the swap

arrangement.

B. Drawings must be approved by the Commit-

tee (or by the Subcommittee, if the Subcom-

mittee believes that consultation with the full

Committee is not feasible in the time avail-

able, or by the Chairman, if the Chairman

believes that consultation with the Subcom-

mittee is not feasible in the time available) if

the swap drawing proposed by a foreign bank

exceeds the larger of (i) $200 million or

(ii) 15 percent of the size of the swap

arrangement.

C. The manager shall also consult with the Sub-

committee or the Chairman about proposed

swap drawings by the System.

D. Any changes in the terms of existing swap

arrangements shall be referred for review and

approval to the Chairman. The Chairman

shall keep the Committee informed of any

changes in terms, and the terms shall be con-

sistent with principles discussed with and

guidance provided by the Committee.

2. For the dollar and foreign currency liquidity swap

arrangements authorized in paragraphs 2.B and

2.C of the Authorization for Foreign Currency

Operations:

A. Drawings must be approved by the Chairman

in consultation with the Subcommittee. The

Chairman or the Subcommittee will consult

with the Committee prior to the initial draw-

ing on the dollar or foreign currency liquidity

swap lines if possible under the circumstances

then prevailing; authority to approve subse-

quent drawings for either the dollar or for-

eign currency liquidity swap lines may be del-

egated to the manager by the Chairman.

B. Any changes in the terms of existing swap

arrangements shall be referred for review and

approval to the Chairman. The Chairman

shall keep the Committee informed of any

changes in terms, and the terms shall be con-

sistent with principles discussed with and

guidance provided by the Committee.

3. Any operation must be approved by:

The Subcommittee (or by the Chairman, if

the Chairman believes that consultation with

the Subcommittee is not feasible in the time

available) if it:

Would result in a change in the System’s

overall open position in foreign currencies

exceeding $300 million on any day or

$600 million since the most recent regular

meeting of the Committee.

ii.

Would result in a change on any day in

the System’s net position in a single for-

eign currency exceeding $150 million, or

$300 million when the operation is associ-

ated with repayment of swap drawings.

iii.

Might generate a substantial volume of

trading in a particular currency by the

System, even though the change in the

System’s net position in that currency (as

defined in paragraph 1.D of the Authori-

zation for Foreign Currency Operations)

might be less than the limits specified in

3.A.ii.

The Committee (or by the Subcommittee, if

the Subcommittee believes that consultation

with the full Committee is not feasible in the

time available, or by the Chairman, if the

Chairman believes that consultation with the

Subcommittee is not feasible in the time

available) if it would result in a change in the

System’s overall open position in foreign cur-

rencies exceeding $1.5 billion since the most

recent regular meeting of the Committee.

The Committee authorizes the Federal Reserve

Bank of New York to undertake transactions of

the type described in paragraphs 1, 2, and 5 of

the Authorization for Foreign Currency Opera-

tions and foreign exchange and investment trans-

actions that it may be otherwise authorized to

undertake from time to time for the purpose of

testing operational readiness. The aggregate

amount of such transactions shall not exceed

$2.5 billion per calendar year. These transactions

shall be conducted with prior notice to the

Committee.

In its annual reconsideration of the Statement on

Longer-Run Goals and Monetary Policy Strategy,

participants generally agreed that only minor updates

Minutes of Federal Open Market Committee Meetings | January 137

were required at this meeting. It was noted, however,

that because this was the third year in which the

statement was being issued, the coming year would

be an appropriate time to consider whether the state-

ment could be enhanced in any way. For example,

some participants advocated an explicit indication

that inflation persistently below the Committee’s

2 percent longer-run objective and inflation persis-

tently above that objective would be equally undesir-

able. Some others suggested that the statement could

more clearly describe how the mandated goals of

maximum employment and price stability are linked

with the objective of financial stability. Following the

discussion, the Committee voted to approve minor

wording changes to the statement and to update the

statement’s reference to participants’ estimates of the

longer-run normal unemployment rate. Mr. Tarullo

abstained from the vote because he continued to

think that the statement had not advanced the cause

of communicating or achieving greater consensus in

the policy views of the Committee.

Statement on Longer-Run Goals and Monetary

Policy Strategy (As Amended Effective

January 28, 2014)

“The Federal Open Market Committee (FOMC)

is firmly committed to fulfilling its statutory

mandate from the Congress of promoting maxi-

mum employment, stable prices, and moderate

long-term interest rates. The Committee seeks to

explain its monetary policy decisions to the pub-

lic as clearly as possible. Such clarity facilitates

well-informed decisionmaking by households

and businesses, reduces economic and financial

uncertainty, increases the effectiveness of mon-

etary policy, and enhances transparency and

accountability, which are essential in a demo-

cratic society.

Inflation, employment, and long-term interest

rates fluctuate over time in response to economic

and financial disturbances. Moreover, monetary

policy actions tend to influence economic activ-

ity and prices with a lag. Therefore, the Commit-

tee’s policy decisions reflect its longer-run goals,

its medium-term outlook, and its assessments of

the balance of risks, including risks to the finan-

cial system that could impede the attainment of

the Committee’s goals.

The inflation rate over the longer run is primar-

ily determined by monetary policy, and hence

the Committee has the ability to specify a

longer-run goal for inflation. The Committee

reaffirms its judgment that inflation at the rate

of 2 percent, as measured by the annual change

in the price index for personal consumption

expenditures, is most consistent over the longer

run with the Federal Reserve’s statutory man-

date. Communicating this inflation goal clearly

to the public helps keep longer-term inflation

expectations firmly anchored, thereby fostering

price stability and moderate long-term interest

rates and enhancing the Committee’s ability to

promote maximum employment in the face of

significant economic disturbances.

The maximum level of employment is largely

determined by nonmonetary factors that affect

the structure and dynamics of the labor market.

These factors may change over time and may

not be directly measurable. Consequently, it

would not be appropriate to specify a fixed goal

for employment; rather, the Committee’s policy

decisions must be informed by assessments of

the maximum level of employment, recognizing

that such assessments are necessarily uncertain

and subject to revision. The Committee consid-

ers a wide range of indicators in making these

assessments. Information about Committee par-

ticipants’ estimates of the longer-run normal

rates of output growth and unemployment is

published four times per year in the FOMC’s

Summary of Economic Projections. For

example, in the most recent projections, FOMC

participants’ estimates of the longer-run normal

rate of unemployment had a central tendency of

5.2 percent to 5.8 percent.

In setting monetary policy, the Committee seeks

to mitigate deviations of inflation from its

longer-run goal and deviations of employment

from the Committee’s assessments of its maxi-

mum level. These objectives are generally

complementary. However, under circumstances

in which the Committee judges that the objec-

tives are not complementary, it follows a bal-

anced approach in promoting them, taking into

account the magnitude of the deviations and the

potentially different time horizons over which

employment and inflation are projected to

return to levels judged consistent with its

mandate.

138 101st Annual Report | 2014

The Committee intends to reaffirm these prin-

ciples and to make adjustments as appropriate at

its annual organizational meeting each January.”

By unanimous vote, the Committee amended its

Rules of Organization to add the position of deputy

manager of the System Open Market Account.

By unanimous vote, the Committee amended its Pro-

gram for Security of FOMC Information with minor

changes to the review and reporting process for

breaches in the information security rules and with

several other minor updates and clarifications.

By unanimous vote, the Committee selected Simon

Potter and Lorie K. Logan to serve at the pleasure of

the Committee as manager and deputy manager of

the System Open Market Account, respectively, on

the understanding that their selection was subject to

their being satisfactory to the Federal Reserve Bank

of New York.

Secretary’s note: Advice subsequently was

received that the manager and deputy manager

selections indicated above were satisfactory to the

Federal Reserve Bank of New York.

Developments in Financial Markets and

the Federal Reserve’s Balance Sheet

The manager of the System Open Market Account

(SOMA) reported on developments in domestic and

foreign financial markets as well as System open mar-

ket operations during the period since the Federal

Open Market Committee met on December 17–18,

2013. The manager also presented an update on the

ongoing overnight reverse repurchase agreement (ON

RRP) exercise. All operations to date had proceeded

smoothly. The number of participating counterpar-

ties and total allotment in the daily operations

increased in late December, in part reflecting the fact

that overnight secured rates were low compared with

the fixed rate offered in the operations as well as the

increase in the cap on individual counterparty bids to

$3 billion from $1 billion that was implemented on

December 23, 2013. Counterparties’ year-end bal-

ance sheet adjustments also boosted participation for

a time; the ON RRP operations reportedly helped

limit downward pressure on money market rates

around year-end.

Following the manager’s report, meeting participants

discussed a proposal to extend the Desk’s authority

to conduct the ON RRP exercise for 12 months and

to lift the per-counterparty bid limit. Under the

terms of the proposal, the interest rate on ON RRPs

would remain between 0 and 5 basis points. The

Chair of the FOMC would authorize any changes in

the offered rate or per-counterparty bid limit. Adjust-

ments to the bid limit would be made in gradual

steps, and the Committee would be consulted before

the exercise would move to full allotment. The pro-

posed changes were intended to allow the Committee

to obtain additional information about the potential

usefulness of ON RRP operations for affecting mar-

ket interest rates when that step becomes appropriate.

Most meeting participants supported the proposal,

with a couple emphasizing that the period for which

the exercise would be extended was likely sufficiently

long that counterparties would be willing to adjust

their current money market practices, thereby provid-

ing better information on the possible market effects

of such operations. It was remarked that the addi-

tional insights obtained from the exercise could be

useful in the context of the Committee’s future dis-

cussions about monetary policy implementation over

the medium and longer term. A number of partici-

pants, however, indicated a preference for retaining a

cap on the per-counterparty bid limit until the Com-

mittee has discussed possible approaches to medium-

term policy implementation, and a few of these par-

ticipants preferred to extend the exercise for a shorter

period.

Following the discussion, the Committee approved

the following resolution:

“The Federal Open Market Committee (FOMC)

authorizes the Federal Reserve Bank of New

York to conduct a series of fixed-rate, overnight

reverse repurchase operations involving U.S.

Government securities, and securities that are

direct obligations of, or fully guaranteed as to

principal and interest by, any agency of the

United States, for the purpose of further assess-

ing the potential role for such operations in sup-

porting the implementation of monetary policy.

The reverse repurchase operations authorized by

this resolution shall be offered at a fixed rate

that may vary from zero to five basis points, and

for an overnight term, or such longer term as is

warranted to accommodate weekend, holiday,

and similar trading conventions. Any change to

the offered rate within the range specified above

or the per-counterparty bid limits will require

approval of the Chairman. The System Open

Market Account manager will notify the FOMC

in advance about any changes to the terms of

Minutes of Federal Open Market Committee Meetings | January 139

operations. These operations shall be authorized

through January 30, 2015.”

Messrs. Fisher and Plosser dissented because of their

preference for retaining a cap on the maximum size

of counterparties’ offers during the extension; Mr.

Plosser also preferred a shorter extension of the

exercise.

By unanimous vote, the Committee ratified the Open

Market Desk’s domestic transactions over the inter-

meeting period. There were no intervention opera-

tions in foreign currencies for the System’s account

over the intermeeting period.

Staff Review of the Economic Situation

The information reviewed for the January 28–29

meeting indicated that the rate of economic growth

picked up in the second half of 2013. Total payroll

employment increased in December, but at a slower

pace than in previous months, and the unemploy-

ment rate declined but was still elevated. Consumer

price inflation continued to run below the Commit-

tee’s longer-run objective, while measures of longer-

term inflation expectations remained stable.

Overall, labor market indicators appeared consistent

with a gradual ongoing improvement in labor market

conditions. Total nonfarm payroll employment

expanded by less in December than in the previous

two months, perhaps partly because of unusually bad

weather. The unemployment rate declined to 6.7 per-

cent in December. The labor force participation rate

also decreased, and the employment-to-population

ratio was little changed. The rate of long-duration

unemployment declined, but the share of workers

employed part time for economic reasons was little

changed, and both measures remained elevated.

Among other indicators of labor market conditions,

the rate of job openings edged up in recent months,

and the share of small businesses reporting that they

had hard-to-fill positions trended up. Measures of

firms’ hiring plans were higher than a year earlier,

but the rate of gross private-sector hiring was still

low. Initial claims for unemployment insurance

moved down, on balance, over the intermeeting

period, and household expectations of the labor mar-

ket situation improved, on net, in December and

early January.

Manufacturing production increased at a robust pace

in the fourth quarter, with broad-based gains across

industries. Indicators of manufacturing production,

such as the readings on new orders from national and

regional manufacturing surveys, were consistent with

a further expansion in factory output early this year,

but automakers’ production schedules indicated that

the pace of light motor vehicle assemblies would

decline in the first quarter.

Real personal consumption expenditures (PCE) rose

at a faster pace in October and November than in the

third quarter. In December, the components of the

nominal retail sales data used by the Bureau of Eco-

nomic Analysis to construct its estimate of PCE

increased strongly, although sales of light motor

vehicles declined after posting a large gain in Novem-

ber. Recent information on several important factors

that influence household spending was somewhat

mixed. Households’ real disposable income was little

changed in October and November, and the expira-

tion of the emergency unemployment compensation

program at the end of 2013 was expected to reduce

aggregate income growth early this year. However,

households’ net worth likely continued to expand in

recent months as a result of rising equity prices and

home values. Consumer sentiment in the Thomson

Reuters/University of Michigan Surveys of Consum-

ers improved, on balance, in December and early

January after a decline in the fall of 2013.

The pace of activity in the housing sector showed

some tentative signs of stabilizing, as the effects of

the past year’s rise in mortgage rates appeared to

wane. Single-family housing starts increased in

November and only partly reversed that gain in

December, while permits for new construction rose a

little, on balance, in the fourth quarter. New home

sales declined in November and December but were

nonetheless higher than in the third quarter, and

existing home sales flattened out in December after

decreasing for several months.

Real private expenditures for business equipment and

intellectual property products appeared to strengthen

in the fourth quarter, as nominal shipments of non-

defense capital goods rose at a solid pace. Although

nominal new orders for these capital goods declined

in December and November’s increase was revised

down, the level of orders remained above that of

shipments, pointing to further increases in shipments

in subsequent months. Other forward-looking indica-

tors, such as surveys of business conditions and capi-

tal spending plans, were also generally consistent with

near-term gains in business equipment spending.

Nominal expenditures for nonresidential construc-

tion, which had been flat in October, moved higher in

140 101st Annual Report | 2014

November. Data on book-value inventories suggested

little change in the pace of nonfarm inventory invest-

ment in the fourth quarter, and the available informa-

tion did not point to significant inventory imbalances

in most industries.

Real federal government purchases likely fell sharply

in the fourth quarter because of continued declines in

defense spending and the temporary partial shut-

down of the federal government in October.

Increases in real state and local government pur-

chases appeared to have moderated in the fourth

quarter. The payrolls of these governments were

about unchanged during the fourth quarter, and

nominal state and local construction expenditures for

October and November increased at a slower pace,

on net, than in the third quarter.

The U.S. international trade deficit narrowed sub-

stantially in November, as exports increased and

imports fell. The higher value of exports stemmed in

large part from an increase in sales of petroleum

products, while the fall in imports was primarily due

to a decline in purchases of crude oil.

Total U.S. consumer price inflation, as measured by

the PCE price index, was a little under 1 percent over

the 12 months ending in November, well below the

Committee’s 2 percent longer-term objective. Over

that period, consumer energy prices declined, con-

sumer food prices rose modestly, and core PCE

prices—which exclude consumer food and energy

prices—increased slightly more than 1 percent. In

December, the consumer price index (CPI) rose

somewhat faster than in recent months, primarily

reflecting an upturn in consumer energy prices; core

CPI inflation remained low. Both near-term and

longer-term inflation expectations from the Michigan

survey were little changed, on net, in December and

early January. Over the 12 months ending in Decem-

ber, nominal average hourly earnings for all employ-

ees increased slightly faster than consumer price

inflation.

Foreign economic activity continued to improve, with

economic growth in the third quarter of 2013 higher

than in the first half of the year and more recent

indicators suggesting further gains. The pickup was

widespread, as the euro area registered a second con-

secutive quarter of positive economic growth, the

Mexican economy bounced back from a second-

quarter contraction, and stronger external demand

boosted growth in emerging market economies more

generally. At the same time, inflation continued to

run below central bank targets in several advanced

economies, and monetary policy remained expan-

sionary in these economies. Inflation in emerging

market economies remained moderate on average,

although Brazil, India, and Turkey again tightened

monetary policy during the intermeeting period in

response to concerns about inflation and currency

depreciation. The policy tightening in Turkey was

particularly sharp and followed several days of

heightened f inancial market pressures toward the end

of the intermeeting period. Similar pressures were

evident in some other emerging market economies as

well.

Staff Review of the Financial Situation

Financial market conditions over the intermeeting

period were importantly influenced by Federal

Reserve communications, somewhat better-than-

expected economic data releases, and developments

in emerging market economies. On net, financial con-

ditions in the United States remained supportive of

growth in economic activity and employment: Equity

prices increased a bit, longer-term interest rates

declined, and the dollar appreciated against most

other currencies.

While investors were somewhat surprised by the

FOMC’s decision at its December meeting to reduce

the pace of its asset purchases, the policy action and

associated communications appeared to have only a

limited effect on market participants’ outlook for the

Federal Reserve’s balance sheet. Indeed, the Commit-

tee’s decision to cut the pace of purchases and its

rationale for doing so seemed to increase investors’

confidence in the economic outlook, a shift that was

further supported by subsequent U.S. economic data

releases. However, those effects were reversed late in

the period when investors appeared to pull back from

riskier assets in reaction to rising concern about

developments in some emerging market economies

and their possible implications for global economic

growth.

Results from the Desk’s survey of primary dealers

conducted prior to the January meeting indicated

that dealers anticipated only minor changes to the

Committee’s postmeeting statement. In addition, the

median dealer expected a $10 billion reduction in the

monthly pace of asset purchases to be announced at

each meeting in the first three quarters of 2014, with

the purchase program ending with a final $15 billion

reduction at the October 2014 meeting.

Minutes of Federal Open Market Committee Meetings | January 141

On balance, 10-and 30-year nominal Treasury yields

declined about 10 basis points and 20 basis points,

respectively, over the intermeeting period, in part

because of an increase in safe-haven demands toward

the end of the period. The December policy action

and subsequent muted market reaction led to

decreased uncertainty about future longer-term inter-

est rates, perhaps contributing to the decline in

longer-term rates. The measure of 5-year inflation

compensation based on Treasury inflation-protected

securities increased a little, while inflation compensa-

tion 5 to 10 years ahead decreased somewhat.

Conditions in short-term dollar funding markets gen-

erally remained stable. Year-end funding pressures

were modest, and overnight money market rates

declined about in line with their typical behavior in

past years. Repo rates were quite low at the end of

the year and remained low through most of January,

leading to increased participation in the Federal

Reserve’s ON RRP operations, with a substantial

temporary increase in take-up at year-end. Primarily

reflecting the increased participation in the exercise,

reserve balances expanded more slowly and the rate

of increase in the monetary base slowed in Decem-

ber. M2 continued to expand moderately.

Reflecting the improved outlook for economic activ-

ity and despite mixed fourth-quarter earnings results,

the stock prices of bank holding companies rose

notably and spreads on credit default swaps for the

largest bank holding companies narrowed somewhat.

According to the January Senior Loan Officer Opin-

ion Survey on Bank Lending Practices, domestic

banks continued to ease their lending standards and

some loan terms on balance; they also experienced an

increase in demand, on net, in most major loan cat-

egories in the fourth quarter.

Broad U.S. equity price indexes edged higher, on net,

over the intermeeting period, and equity issuance by

nonfinancial corporations increased. Credit remained

widely available to large nonfinancial corporations.

Corporate bond spreads continued to narrow over

the intermeeting period, with investment-grade bond

spreads reaching their lowest levels in several years

and those on speculative-grade corporate bonds

approaching pre-crisis levels. Bond issuance by

domestic corporations generally stayed strong, com-

mercial and industrial loans on banks’ books

increased by a notable amount late in the fourth

quarter, and issuance of leveraged loans and collater-

alized loan obligations generally continued apace.

Conditions in the commercial real estate sector recov-

ered further in the fourth quarter, with rising prop-

erty prices and fewer distressed sales. In the market

for commercial mortgage-backed securities, investor

demand remained strong and spreads continued to

be tight despite high issuance near year-end. Com-

mercial real estate loans on banks’ books expanded

moderately.

Credit conditions in municipal bond markets gener-

ally remained stable, although a few issuers continued

to experience substantial strain. Available data sug-

gest that, for the first time in several years, the ratings

agency Moody’s Investors Service made more

upgrades than downgrades to municipal debt in the

fourth quarter. However, Moody’s put Puerto Rico

on watch for a downgrade.

Households continued to face mixed credit condi-

tions in the fourth quarter. Consumer credit

expanded again in November, boosted by further

gains in auto and student loans, and bank credit data

indicate that this expansion likely continued through

December. In contrast, credit card balances were

little changed, on net, through November, as under-

writing appeared to remain quite tight. The volume

of mortgage applications for home purchases held

about steady since the previous FOMC meeting while

refinance applications remained at very low levels.

Mortgage rates declined slightly, in line with mod-

estly lower yields on agency mortgage-backed securi-

ties. Despite tight mortgage availability and subdued

borrowing, house prices continued to increase in

November, although not as quickly as earlier in 2013.

Financial market conditions in the advanced foreign

economies over the intermeeting period generally

became more supportive of growth. Long-term gov-

ernment bond yields declined and headline equity

indexes increased, on net, in most of these countries,

with bank stock prices in the euro area rising more

than broader indexes. In addition, debt issuance by

both governments and banks in the European

periphery picked up, and sovereign yield spreads in

those countries were flat to down, on balance, over

the period. In contrast, amid a ratcheting-up of

financial market strains in some emerging market

economies, headline stock price indexes in most

emerging market economies declined, outflows from

emerging market mutual funds continued, and yield

spreads on dollar-denominated emerging market

bonds increased. Local-currency yields rose in some

emerging market economies, such as Brazil, South

142 101st Annual Report | 2014

Africa, and Turkey, and short-term interbank rates in

China were volatile and trended higher over the

period. The foreign exchange value of the dollar

appreciated against most other currencies over the

period, with particularly large increases against the

Argentine peso and the Turkish lira.

Staff Economic Outlook

In the economic projection prepared by the staff for

the January FOMC meeting, growth of real gross

domestic product (GDP) in the second half of 2013

was estimated to have been stronger than the staff

had expected, though some of the strength in inven-

tory investment and net exports was possibly transi-

tory. The staff’s medium-term forecast for real GDP

growth was little revised, on balance, as the momen-

tum implied by faster GDP growth in the second half

of 2013 was largely offset by a higher projected path

for the foreign exchange value of the dollar. In addi-

tion, the staff revised downward its view of the pace

at which potential output had increased over recent

years and would increase this year and next. The staff

continued to project that real GDP would expand

more quickly over the next few years than in 2013

and that real GDP would rise faster than potential

output. This acceleration in economic activity was

expected to be supported by still-accommodative

monetary policy and an easing in the effects of fiscal

policy restraint on economic growth, as well as by

increases in consumer and business confidence, fur-

ther improvements in credit availability and financial

conditions, and continued gains in foreign economic

growth. The expansion in economic activity was

anticipated to lead to a slow reduction in resource

slack over the projection period, and the unemploy-

ment rate was expected to decline gradually, reaching

the staff’s estimate of its longer-run natural rate in

2016.

The staff’s forecast for inflation was little changed

from the projection prepared for the previous FOMC

meeting, although the near-term forecast was revised

down a little to reflect recent declines in energy

prices. The staff continued to forecast that inflation

would run well below the Committee’s 2 percent

objective early this year but above the low level

observed over much of 2013. Over the medium term,

with longer-run inflation expectations assumed to

remain stable, changes in commodity and import

prices expected to be muted, and slack in labor and

product markets receding gradually, inflation was

projected to move back slowly toward the Commit-

tee’s objective.

In considering recent events in emerging market

economies, the staff judged that the effects of recent

financial market volatility had not been large enough

to have a material effect on the overall outlook for

those economies and, similarly, that the spillover

effects on the United States of developments to date

were likely to be modest. Because conditions were in

flux, however, these markets would require careful

monitoring.

The staff continued to see a number of risks around

its outlook. The downside risks to the forecast for

real GDP growth were thought to have diminished,

but the risks were still seen as tilted a little to the

downside because, with the target federal funds rate

at its effective lower bound, the economy was not

well positioned to withstand future adverse shocks.

At the same time, the staff viewed the risks around

its outlook for the unemployment rate and for infla-

tion as roughly balanced.

Participants’ Views on Current Conditions

and the Economic Outlook

In their discussion of the economic situation and the

outlook, participants generally noted that economic

activity had strengthened more in the second half of

2013 than they had expected at the time of the

December meeting. In particular, consumer spending

had strengthened, and business investment appeared

to be on a more solid uptrend. Although the govern-

ment shutdown likely damped economic growth

somewhat, the extent of restraint on growth from fis-

cal policy diminished late in the year. However, sev-

eral participants observed that temporary factors had

helped boost real GDP during the second half, point-

ing specifically to the substantial contributions from

net exports and increased inventory investment. As a

result, participants generally did not expect the recent

pace of economic growth to be sustained, but they

nonetheless anticipated that the economy would

expand at a moderate pace in coming quarters. That

expansion was expected to be supported by highly

accommodative monetary policy, a further easing of

fiscal restraint, and a modest additional pickup in

global economic growth, as well as continued

improvement in credit conditions and the ongoing

strengthening in household balance sheets. A number

of participants noted that recent economic news had

reinforced their confidence in their projection of

moderate economic growth over the medium run. It

was also noted that recent developments in several

emerging market economies, if they continued, could

pose downside risks to the outlook. Overall, most

Minutes of Federal Open Market Committee Meetings | January 143

participants still viewed the risks to the outlook for

the economy and the labor market as having become

more nearly balanced in recent months.

Consumer spending had advanced strongly in late

2013, contributing importantly to the pickup in

growth of economic activity. This picture was rein-

forced by survey data that suggested that consumers

had become more optimistic about future income

gains. While noting that households remained cau-

tious, participants cited a number of factors that

were likely to continue to underpin gains in house-

hold spending, including rising house prices, growing

confidence in the sustainability of the economic

expansion, increasing payrolls, and the high ratio of

household wealth to disposable income.

Although the recovery in the housing sector had

slowed somewhat in recent months, a number of par-

ticipants reported solid activity in their Districts.

Moreover, various factors were seen as likely to sup-

port stronger growth in the sector going forward,

including favorable housing affordability, which was

in turn partly due to still-low mortgage rates, and

demographic trends. However, there were also rea-

sons for being cautious about the prospects for hous-

ing construction, such as recent disappointing news

on permits for new construction and the possibility

that investors’ interest in purchasing properties for

the rental market would recede.

Business contacts in many parts of the country

reported that they were guardedly optimistic about

prospects for 2014. While inventory investment

would likely come down from its recent unusually

high level, participants heard more reports that the

business sector was willing to increase spending on

capital projects. A number of factors were cited as

likely to support such an increase, including the high

level of profits, the low level of interest rates, a reduc-

tion in policy uncertainty, the easing of lending stan-

dards, and large holdings of liquid assets by

corporations.

In discussing financial developments over the inter-

meeting period, several participants noted that the

Committee’s December decision to make a modest

reduction in the monthly pace of asset purchases had

not resulted in an adverse market reaction. Several

participants observed that current market expecta-

tions for asset purchases and the future course of the

federal funds rate were reasonably well aligned with

participants’ own expectations of the path for policy.

However, one participant expressed concern that

longer-term interest rates could rise sharply if market

participants’ expectations of future monetary policy

came to deviate from those of policymakers, as

appeared to have happened last summer, while a

couple of others argued that the current highly

accommodative stance of monetary policy could lead

investors to take on excessive risk and so undermine

longer-term financial stability. Recent volatility in

emerging markets appeared to have had only a lim-

ited effect to date on U.S. financial markets. Never-

theless, participants agreed that a number of devel-

opments in financial markets needed to be watched

carefully, including the financing situation of the

Puerto Rican government and particularly the

unfolding events in emerging markets.

In their discussion of recent labor market develop-

ments, many participants commented on the rela-

tively small increase in payrolls in December and the

further decline in the unemployment rate. A number

of participants indicated that the December payrolls

figure may have been an anomaly, perhaps impor-

tantly reflecting bad weather, and it was noted that

the initial readings on payrolls in recent years had

subsequently tended to be revised up. In addition,

some participants reported that their business con-

tacts had become more positive about hiring in the

year ahead. Participants continued to debate the reli-

ability of the unemployment rate as an indicator of

overall labor market conditions, taking into account

the further decline in labor force participation in

recent quarters, still-elevated levels of underemploy-

ment and long-term unemployment, and the appar-

ent absence of wage pressures. Much of the down-

ward trend in the labor force participation rate since

the start of the recession was seen as the result of

shifts in the demographic composition of the work-

force and the retirement of older workers; the extent

of the cyclical portion of the decline was viewed by

some as difficult to gauge at present. A few partici-

pants judged that the decline in participation for

younger and prime-age workers likely reflected the

slow recovery in jobs and wages and so might be

reversed as labor market conditions strengthened. In

addition, several others pointed out that broader

concepts of the unemployment rate, such as those

that include nonparticipants who report that they

want a job and those working part time who want

full-time work, remained well above the official

unemployment rate, suggesting that considerable

labor market slack remained despite the reduction in

the unemployment rate. A few participants noted

worker shortages in specific regions and occupations,

with one District reporting widespread shortages of

144 101st Annual Report | 2014

skilled labor leading to emerging labor cost pressures.

However, a number of participants saw the low rates

of increase in most measures of wages as consistent

with continued labor market slack.

Inflation remained below the Committee’s longer-run

objective over the intermeeting period. Participants

still anticipated that, with longer-run inflation expec-

tations stable, transitory factors that had been damp-

ing inflation likely to recede, and economic activity

picking up, inflation would move back toward the

Committee’s 2 percent objective over the medium

run. However, several factors that cast doubt on this

outcome were also mentioned, including slow growth

in labor costs, the lack of pricing power reported by

business contacts in various parts of the country, the

low level of inflation in other advanced economies,

and the danger that inflation expectations at short

and medium horizons might not be as well anchored

as longer-run inflation expectations. Participants

noted that inflation persistently below the Commit-

tee’s objective would pose risks to economic perfor-

mance and that inflation developments would need

to be monitored carefully.

In their discussion of the path for monetary policy,

most participants judged that the incoming informa-

tion about the economy was broadly in line with their

expectations and that a further modest step down in

the pace of purchases was appropriate. A couple of

participants observed that continued low readings on

inflation and considerable slack in the labor market

raised questions about the desirability of reducing

the pace of purchases; these participants judged,

however, that a pause in the reduction of purchases

was not justified at this stage, especially in light of

the strength of the economy in the second half of

2013. Several participants argued that, in the absence

of an appreciable change in the economic outlook,

there should be a clear presumption in favor of con-

tinuing to reduce the pace of purchases by a total of

$10 billion at each FOMC meeting. That said, a

number of participants noted that if the economy

deviated substantially from its expected path, the

Committee should be prepared to respond with an

appropriate adjustment to the trajectory of its

purchases.

Participants agreed that, with the unemployment rate

approaching 6½ percent, it would soon be appropri-

ate for the Committee to change its forward guidance

in order to provide information about its decisions

regarding the federal funds rate after that threshold

was crossed. A range of views was expressed about

the form that such forward guidance might take.

Some participants favored quantitative guidance

along the lines of the existing thresholds, while others

preferred a qualitative approach that would provide

additional information regarding the factors that

would guide the Committee’s policy decisions. Sev-

eral participants suggested that risks to financial sta-

bility should appear more explicitly in the list of fac-

tors that would guide decisions about the federal

funds rate once the unemployment rate threshold is

crossed, and several participants argued that the for-

ward guidance should give greater emphasis to the

Committee’s willingness to keep rates low if inflation

were to remain persistently below the Committee’s

2 percent longer-run objective. Additional proposals

included relying to a greater extent on the Summary

of Economic Projections as a communications device

and including in the guidance an indication of the

Committee’s willingness to adjust policy to lean

against undesired changes in financial conditions.

A few participants raised the possibility that it might

be appropriate to increase the federal funds rate rela-

tively soon. One participant cited evidence that the

equilibrium real interest rate had moved higher, and a

couple of them noted that some standard policy rules

tended to suggest that the federal funds rate should

be raised above its effective lower bound before the

middle of this year. Other participants, however, sug-

gested that prescriptions from standard policy rules

were not appropriate in current circumstances, either

because the target federal funds rate had been con-

strained by the lower bound for some time or because

the equilibrium real rate of interest was likely still

being held down by various factors, including the lin-

gering effects of the financial crisis, and was signifi-

cantly below the value of the longer-run rate built

into standard policy rules.

Committee Policy Action

Committee members saw the information received

over the intermeeting period as indicating that

growth in economic activity had picked up in recent

quarters. Labor market indicators were mixed but on

balance showed further improvement. The unem-

ployment rate had declined but remained elevated

when judged against members’ estimates of the

longer-run normal rate of unemployment. House-

hold spending and business fixed investment had

advanced more quickly in recent months than earlier

in 2013, while the recovery in the housing sector had

slowed somewhat. Fiscal policy was restraining eco-

nomic growth, although the extent of the restraint

Minutes of Federal Open Market Committee Meetings | January 145

had diminished. The Committee expected that, with

appropriate policy accommodation, the economy

would expand at a moderate pace and the unemploy-

ment rate would gradually decline toward levels con-

sistent with the dual mandate. Moreover, members

continued to judge that the risks to the outlook for

the economy and the labor market had become more

nearly balanced. Inflation was running below the

Committee’s longer-run objective, and this was seen

as posing possible risks to economic performance,

but members anticipated that stable inflation expec-

tations and strengthening economic activity would,

over time, return inflation to the Committee’s 2 per-

cent objective. However, in light of their concerns

about the persistence of low inflation, many mem-

bers saw a need for the Committee to monitor infla-

tion developments carefully for evidence that infla-

tion was moving back toward its longer-run

objective.

In their discussion of monetary policy in the period

ahead, all members agreed that the cumulative

improvement in labor market conditions and the like-

lihood of continuing improvement indicated that it

would be appropriate to make a further measured

reduction in the pace of its asset purchases at this

meeting. Members again judged that, if the economy

continued to develop as anticipated, further reduc-

tions would be undertaken in measured steps. Mem-

bers also underscored that the pace of asset pur-

chases was not on a preset course and would remain

contingent on the Committee’s outlook for the labor

market and inflation as well as its assessment of the

efficacy and costs of purchases. Accordingly, the

Committee agreed that, beginning in February, it

would add to its holdings of agency mortgage-

backed securities at a pace of $30 billion per month

rather than $35 billion per month, and would add to

its holdings of longer-term Treasury securities at a

pace of $35 billion per month rather than $40 billion

per month. While making a further measured reduc-

tion in its pace of purchases, the Committee empha-

sized that its holdings of longer-term securities were

sizable and would still be increasing, which would

promote a stronger economic recovery by maintain-

ing downward pressure on longer-term interest rates,

supporting mortgage markets, and helping to make

broader financial conditions more accommodative.

The Committee also reiterated that it would continue

its asset purchases, and employ its other policy tools

as appropriate, until the outlook for the labor market

has improved substantially in a context of price

stability.

In considering forward guidance about the target fed-

eral funds rate, all members agreed to retain the

thresholds-based language employed in recent state-

ments. In addition, the Committee decided to repeat

the qualitative guidance, introduced in December,

clarifying that a range of labor market indicators

would be used when assessing the appropriate stance

of policy once the unemployment rate threshold had

been crossed. Members also agreed to reiterate lan-

guage indicating the Committee’s anticipation, based

on its current assessment of additional measures of

labor market conditions, indicators of inflation pres-

sures and inflation expectations, and readings on

financial developments, that it would be appropriate

to maintain the current target range for the federal

funds rate well past the time that the unemployment

rate declines below 6½ percent, especially if projected

inflation continues to run below the Committee’s

longer-run objective.

Members also discussed other elements of the policy

statement to be issued following the meeting. Mem-

bers agreed on updating the description of the state

of the economy to reflect the recent strength of

household and business spending and to note that,

although the labor market showed further improve-

ment on balance, the recent indicators were mixed.

Members did not see an appreciable change in the

balance of risks and so left the statement’s descrip-

tion of risks unchanged.

At the conclusion of the discussion, the Committee

voted to authorize and direct the Federal Reserve

Bank of New York, until it was instructed otherwise,

to execute transactions in the SOMA in accordance

with the following domestic policy directive:

“Consistent with its statutory mandate, the Fed-

eral Open Market Committee seeks monetary

and financial conditions that will foster maxi-

mum employment and price stability. In particu-

lar, the Committee seeks conditions in reserve

markets consistent with federal funds trading in

a range from 0 to ¼ percent. The Committee

directs the Desk to undertake open market

operations as necessary to maintain such condi-

tions. Beginning in February, the Desk is

directed to purchase longer-term Treasury secu-

rities at a pace of about $35 billion per month

and to purchase agency mortgage-backed securi-

ties at a pace of about $30 billion per month.

The Committee also directs the Desk to engage

in dollar roll and coupon swap transactions as

146 101st Annual Report | 2014

necessary to facilitate settlement of the Federal

Reserve’s agency mortgage-backed securities

transactions. The Committee directs the Desk to

maintain its policy of rolling over maturing

Treasury securities into new issues and its policy

of reinvesting principal payments on all agency

debt and agency mortgage-backed securities in

agency mortgage-backed securities. The System

Open Market Account Manager and the Secre-

tary will keep the Committee informed of ongo-

ing developments regarding the System’s bal-

ance sheet that could affect the attainment over

time of the Committee’s objectives of maximum

employment and price stability.”

The vote encompassed approval of the statement

below to be released at 2:00 p.m.:

“Information received since the Federal Open

Market Committee met in December indicates

that growth in economic activity picked up in

recent quarters. Labor market indicators were

mixed but on balance showed further improve-

ment. The unemployment rate declined but

remains elevated. Household spending and busi-

ness fixed investment advanced more quickly in

recent months, while the recovery in the housing

sector slowed somewhat. Fiscal policy is

restraining economic growth, although the

extent of restraint is diminishing. Inflation has

been running below the Committee’s longer-run

objective, but longer-term inflation expectations

have remained stable.

Consistent with its statutory mandate, the Com-

mittee seeks to foster maximum employment

and price stability. The Committee expects that,

with appropriate policy accommodation, eco-

nomic activity will expand at a moderate pace

and the unemployment rate will gradually

decline toward levels the Committee judges con-

sistent with its dual mandate. The Committee

sees the risks to the outlook for the economy

and the labor market as having become more

nearly balanced. The Committee recognizes that

inflation persistently below its 2 percent objec-

tive could pose risks to economic performance,

and it is monitoring inflation developments care-

fully for evidence that inflation will move back

toward its objective over the medium term.

Taking into account the extent of federal fiscal

retrenchment since the inception of its current

asset purchase program, the Committee contin-

ues to see the improvement in economic activity

and labor market conditions over that period as

consistent with growing underlying strength in

the broader economy. In light of the cumulative

progress toward maximum employment and the

improvement in the outlook for labor market

conditions, the Committee decided to make a

further measured reduction in the pace of its

asset purchases. Beginning in February, the

Committee will add to its holdings of agency

mortgage-backed securities at a pace of $30 bil-

lion per month rather than $35 billion per

month, and will add to its holdings of longer-

term Treasury securities at a pace of $35 billion

per month rather than $40 billion per month.

The Committee is maintaining its existing policy

of reinvesting principal payments from its hold-

ings of agency debt and agency mortgage-

backed securities in agency mortgage-backed

securities and of rolling over maturing Treasury

securities at auction. The Committee’s sizable

and still-increasing holdings of longer-term

securities should maintain downward pressure

on longer-term interest rates, support mortgage

markets, and help to make broader financial

conditions more accommodative, which in turn

should promote a stronger economic recovery

and help to ensure that inflation, over time, is at

the rate most consistent with the Committee’s

dual mandate.

The Committee will closely monitor incoming

information on economic and financial develop-

ments in coming months and will continue its

purchases of Treasury and agency mortgage-

backed securities, and employ its other policy

tools as appropriate, until the outlook for the

labor market has improved substantially in a

context of price stability. If incoming informa-

tion broadly supports the Committee’s expecta-

tion of ongoing improvement in labor market

conditions and inflation moving back toward its

longer-run objective, the Committee will likely

reduce the pace of asset purchases in further

measured steps at future meetings. However,

asset purchases are not on a preset course, and

the Committee’s decisions about their pace will

remain contingent on the Committee’s outlook

for the labor market and inflation as well as its

assessment of the likely efficacy and costs of

such purchases.

To support continued progress toward maxi-

mum employment and price stability, the Com-

Minutes of Federal Open Market Committee Meetings | January 147

mittee today reaffirmed its view that a highly

accommodative stance of monetary policy will

remain appropriate for a considerable time after

the asset purchase program ends and the eco-

nomic recovery strengthens. The Committee also

reaffirmed its expectation that the current excep-

tionally low target range for the federal funds

rate of 0 to ¼ percent will be appropriate at least

as long as the unemployment rate remains above

6½ percent, inflation between one and two years

ahead is projected to be no more than a half per-

centage point above the Committee’s 2 percent

longer-run goal, and longer-term inflation

expectations continue to be well anchored. In

determining how long to maintain a highly

accommodative stance of monetary policy, the

Committee will also consider other information,

including additional measures of labor market

conditions, indicators of inflation pressures and

inflation expectations, and readings on financial

developments. The Committee continues to

anticipate, based on its assessment of these fac-

tors, that it likely will be appropriate to maintain

the current target range for the federal funds rate

well past the time that the unemployment rate

declines below 6½ percent, especially if pro-

jected inflation continues to run below the Com-

mittee’s 2 percent longer-run goal. When the

Committee decides to begin to remove policy

accommodation, it will take a balanced

approach consistent with its longer-run goals of

maximum employment and inflation of 2

percent.”

Voting for this action: Ben Bernanke, William C.

Dudley, Richard W. Fisher, Narayana Kocherlakota,

Sandra Pianalto, Charles I. Plosser, Jerome H. Pow-

ell, Jeremy C. Stein, Daniel K. Tarullo, and Janet L.

Yellen.

Voting against this action: None.

It was agreed that the next meeting of the Committee

would be held on Tuesday–Wednesday, March 18–19,

2014. The meeting adjourned at 10:55 a.m. on Janu-

ary 29, 2014.

Notation Vote

By notation vote completed on January 7, 2014, the

Committee unanimously approved the minutes of the

Committee meeting held on December 17–18, 2013.

William B. English

Secretary

148 101st Annual Report | 2014

Meeting Held on March 18–19, 2014

A meeting of the Federal Open Market Committee

was held in the offices of the Board of Governors of

the Federal Reserve System in Washington, D.C., on

Tuesday, March 18, 2014, at 2:00 p.m. and continued

on Wednesday, March 19, 2014, at 8:30 a.m.

Present

Janet L. Yellen

Chair

William C. Dudley

Vice Chairman

Richard W. Fisher

Narayana Kocherlakota

Sandra Pianalto

Charles I. Plosser

Jerome H. Powell

Jeremy C. Stein

Daniel K. Tarullo

Christine Cumming, Charles L. Evans,

Jeffrey M. Lacker, Dennis P. Lockhart,

and John C. Williams

Alternate Members of the Federal Open Market

Committee

James Bullard, Esther L. George,

and Eric Rosengren

Presidents of the Federal Reserve Banks of St. Louis,

Kansas City, and Boston, respectively

William B. English

Secretary and Economist

Matthew M. Luecke

Deputy Secretary

Michelle A. Smith

Assistant Secretary

Scott G. Alvarez

General Counsel

Thomas C. Baxter

Deputy General Counsel

Steven B. Kamin

Economist

David W. Wilcox

Economist

James A. Clouse, Thomas A. Connors,

Evan F. Koenig, Thomas Laubach,

Michael P. Leahy, Loretta J. Mester,

Samuel Schulhofer-Wohl, Mark E. Schweitzer,

and William Wascher

Associate Economists

Simon Potter

Manager, System Open Market Account

Lorie K. Logan

Deputy Manager, System Open Market Account

Michael S. Gibson

Director, Division of Banking Supervision and

Regulation, Board of Governors

Louise L. Roseman

Director, Division of Reserve Bank Operations and

Payment Systems, Board of Governors

Nellie Liang

Director, Office of Financial Stability Policy and

Research, Board of Governors

Stephen A. Meyer and William Nelson

Deputy Directors, Division of Monetary Affairs,

Board of Governors

Jon W. Faust

Special Adviser to the Board, Office of Board

Members, Board of Governors

Trevor A. Reeve

Special Adviser to the Chair, Office of Board

Members, Board of Governors

Ellen E. Meade

Senior Adviser, Division of Monetary Affairs,

Board of Governors

Eric M. Engen, Michael G. Palumbo,

and Wayne Passmore

Associate Directors, Division of Research and

Statistics, Board of Governors

Brian J. Gross

Special Assistant to the Board, Office of Board

Members, Board of Governors

Edward Nelson

Assistant Director, Division of Monetary Affairs,

Board of Governors

Jeremy B. Rudd

Adviser, Division of Research and Statistics,

Board of Governors

Stephanie Aaronson

Section Chief, Division of Research and Statistics,

Board of Governors

Minutes of Federal Open Market Committee Meetings | March 149

Laura Lipscomb

Section Chief, Division of Monetary Affairs,

Board of Governors

David H. Small

Project Manager, Division of Monetary Affairs,

Board of Governors

Peter M. Garavuso

Records Management Analyst, Division of Monetary

Affairs, Board of Governors

David Altig, Jeff Fuhrer, Glenn D. Rudebusch,

and Daniel G. Sullivan

Executive Vice Presidents, Federal Reserve Banks of

Atlanta, Boston, San Francisco, and Chicago,

respectively

Troy Davig, Christopher J. Waller,

and John A. Weinberg

Senior Vice Presidents, Federal Reserve Banks of

Kansas City, St. Louis, and Richmond, respectively

Jonathan P. McCarthy, Keith Sill,

and Douglas Tillett

Vice Presidents, Federal Reserve Banks of New York,

Philadelphia, and Chicago, respectively

Developments in Financial Markets and

the Federal Reserve’s Balance Sheet

The manager of the System Open Market Account

(SOMA) reported on developments in domestic and

foreign financial markets as well as the System open

market operations during the period since the Fed-

eral Open Market Committee (FOMC) met on Janu-

ary 28–29, 2014. By unanimous vote, the Committee

ratified the Open Market Desk’s domestic transac-

tions over the intermeeting period. There were no

intervention operations in foreign currencies for the

System’s account over the intermeeting period.

Staff Review of the Economic Situation

The information reviewed for the March 18–19 meet-

ing indicated that economic growth slowed early this

year, likely only in part because of the temporary

effects of the unusually cold and snowy winter

weather. Total payroll employment expanded further,

while the unemployment rate held steady, on balance,

and was still elevated. Consumer price inflation con-

tinued to run below the Committee’s longer-run

objective, but measures of longer-run inflation expec-

tations remained stable.

Total nonfarm payroll employment rose in January

and February at a slower pace than in the fourth

quarter of last year. The unemployment rate was

6.7 percent in February, the same as in December of

last year. The labor force participation rate, along

with the employment-to-population ratio, increased,

on net, in recent months. Both the share of workers

employed part time for economic reasons and the

rate of long-duration unemployment were lower in

February than they were late last year, although both

measures were still high. Initial claims for unemploy-

ment insurance were little changed over the inter-

meeting period. The rate of job openings stepped

down, while the rate of hiring was unchanged in

December and January.

Manufacturing production was roughly flat, on bal-

ance, in January and February, in part because of the

effects of the severe winter weather, which held down

both motor vehicle output and production outside

the motor vehicle sector. Automakers’ production

schedules indicated that the pace of light motor

vehicle assemblies would increase in the second quar-

ter, and broader indicators of manufacturing produc-

tion, such as the readings on new orders from

national manufacturing surveys, were consistent with

an expectation of moderate expansion in factory out-

put in the coming months.

Real personal consumption expenditures (PCE)

increased a little, on net, in December and January.

However, the components of the nominal retail sales

data used by the Bureau of Economic Analysis to

construct its estimate of PCE rose at a faster rate in

February than in the previous couple of months, and

light motor vehicle sales also moved up. Recent infor-

mation on key factors that influence household

spending, along with the expectation that the weather

would return to seasonal norms, generally pointed

toward additional gains in PCE in the coming

months. Households’ net worth probably continued

to expand as equity prices and home values increased

further, and consumer sentiment in the Thomson

Reuters/University of Michigan Surveys of Consum-

ers during February and early March remained above

its average last fall; however, real disposable incomes

only edged up, on balance, in December and January.

The pace of activity in the housing sector appeared

to soften. Starts for both new single-family homes

and multifamily units were lower in January and Feb-

ruary than at the end of last year. Permits for single-

family homes—which are typically less sensitive to

fluctuations in the weather and a better indicator of

the underlying pace of construction—also moved

down in those months and had not shown a sus-

150 101st Annual Report | 2014

tained improvement since last spring when mortgage

rates began to rise. Sales of existing homes decreased

in January and pending home sales were little

changed, although new home sales expanded.

Growth in real private expenditures for business

equipment and intellectual property products stepped

up in the fourth quarter to a faster rate than in the

third quarter. In January, nominal shipments of non-

defense capital goods excluding aircraft decreased

slightly. However, new orders for these capital goods

increased and remained above the level of shipments

in January, pointing to increases in shipments in sub-

sequent months. Other forward-looking indicators,

such as surveys of business conditions, also were gen-

erally consistent with modest increases in business

equipment spending in the near term. Real business

spending for nonresidential structures was essentially

unchanged in the fourth quarter, and nominal expen-

ditures for such structures were flat in January. Real

nonfarm inventory investment increased at a signifi-

cantly slower pace in the fourth quarter than in the

preceding quarter, and recent data on the book value

of inventories, along with readings on inventories

from national and regional manufacturing surveys,

did not point to significant inventory imbalances in

most industries; however, days’ supply of light motor

vehicles in January and February exceeded the auto-

makers’ targets.

Federal spending data in January and February

pointed toward real federal government purchases

being roughly flat in the first quarter, as the general

downtrend in purchases seemed likely to be about

offset by a reversal of the effects of the partial gov-

ernment shutdown during the fourth quarter. Total

real state and local government purchases also

appeared to be about flat going into the first quarter.

The payrolls of these governments expanded some-

what, on balance, in January and February, but

nominal state and local construction expenditures

declined a little in January.

The U.S. international trade deficit, after widening in

December, remained about unchanged in January.

Exports increased in January, but the gains were

modest as decreases in sales of cars, petroleum prod-

ucts, and agricultural goods were just offset by gains

in other major categories. Imports also rose in Janu-

ary as the increase in the volume of oil imports more

than offset declines in imports of non-oil goods and

services.

Total U.S. consumer price inflation, as measured by

the PCE price index, was about 1¼ percent over the

12 months ending in January, continuing to run

below the Committee’s longer-run objective of 2 per-

cent. Over the same 12-month period, consumer

energy prices rose faster than total consumer prices

while consumer food prices only edged up, and core

PCE prices—which exclude food and energy prices—

increased just a bit more than 1 percent. In February,

the consumer price index (CPI) rose at a pace similar

to that seen in recent months, as food prices rose

more quickly, energy prices declined, and the increase

in the core CPI remained slow. Both near- and

longer-term inflation expectations from the Michigan

survey were little changed in February and early

March.

Measures of labor compensation indicated that

increases in nominal wages remained subdued. Com-

pensation per hour in the nonfarm business sector

increased slightly over the year ending in the fourth

quarter, and, with some gains in labor productiv-

ity, unit labor costs declined a little. Over the same

year-long period, the employment cost index and

average hourly earnings for all employees rose only a

little faster than consumer price inflation.

Foreign real gross domestic product (GDP) expanded

at a moderate pace in the fourth quarter of 2013,

with weak economic growth in Japan and Mexico

offsetting stronger gains in many other economies.

Recent indicators suggested that total foreign real

GDP was expanding at a similar pace in the first

quarter of 2014. The economic recovery in the euro

area appeared to be continuing, and the pace of

Japanese economic growth looked to have picked up.

In Canada, however, severe winter weather appeared

to have held down economic activity in early 2014.

Among the emerging market economies (EMEs),

recent data suggested that economic growth in China

was slowing in the first quarter, and that the rate of

growth in the other Asian economies was also declin-

ing from a very robust fourth-quarter pace. Mexican

real GDP growth slowed sharply in the fourth quar-

ter, led by a contraction in the manufacturing sector,

but recent indicators, such as auto production, sug-

gested some rebound in the pace of economic activity

in the current quarter. Inflation increased slightly in

some advanced economies but remained well below

central banks’ targets. At the same time, inflation

declined in some emerging Asian economies. Mon-

etary policy remained highly accommodative in the

Minutes of Federal Open Market Committee Meetings | March 151

advanced foreign economies. Across the EMEs, mon-

etary policy adjustments varied according to eco-

nomic and financial developments, with some central

banks tightening policy and others loosening it.

Staff Review of the Financial Situation

Financial market conditions in the United States over

the intermeeting period appeared to have been influ-

enced by an easing of concerns about developments

in the EMEs but relatively little affected by the gener-

ally weaker-than-expected economic data, which

market participants appeared to attribute in large

part to the temporary effects of unusually severe win-

ter weather. On balance, U.S. financial conditions

remained supportive of growth in economic activity

and employment: The expected path of the federal

funds rate was little changed, longer-term yields on

Treasury securities edged down, equity prices rose,

speculative-grade corporate bond spreads narrowed,

and the foreign exchange value of the dollar depreci-

ated slightly.

FOMC communications over the intermeeting

period were about in line with market expectations.

The FOMC decision and statement in January were

largely anticipated by market participants. The Mon-

etary Policy Report and Chair Yellen’s accompanying

congressional testimony in February were viewed as

emphasizing continuity in the approach to monetary

policy, solidifying expectations that the pace of the

Committee’s asset purchases would be reduced by a

further $10 billion at each upcoming meeting absent

a material change in the economic outlook.

Results from the Desk’s Survey of Primary Dealers

for March indicated that the dealers’ expectations

about both the likely future path of the federal funds

rate and Federal Reserve asset purchases were largely

unchanged since January. The survey results showed

that most dealers expected the Committee to modify

its forward rate guidance at the March meeting, with

many anticipating a shift toward qualitative

guidance.

Yields on short- and intermediate-term Treasury

securities were little changed, on balance, over the

intermeeting period, as the effects of a waning of

flight-to-quality demands early in the period roughly

offset those of generally weaker-than-expected eco-

nomic data. Yields on longer-term Treasury securities

edged down. Measures of longer-horizon inflation

compensation based on Treasury inflation-protected

securities also declined somewhat.

The Federal Reserve continued its fixed-rate over-

night reverse repurchase agreement (ON RRP) exer-

cise. Early in the intermeeting period, market rates on

repurchase agreements were close to the fixed rate

offered in the exercise, prompting high take-up in the

ON RRP operations. The increases in the interest

rate offered by the Federal Reserve in its ON RRP

exercise, along with the increases in caps for indi-

vidual bids, also may have contributed to higher lev-

els of activity at daily operations. Later in the period,

market rates on repurchase agreements moved higher,

apparently in response to a rise in Treasury bill issu-

ance, and ON RRP volumes moderated. Reflecting

the larger size of the ON RRP exercises and the

reduced pace of asset purchases, the rate of increase

in the monetary base slowed over January and

February.

Conditions in unsecured short-term dollar funding

markets remained stable over the intermeeting

period. Responses to the March 2014 Senior Credit

Officer Opinion Survey on Dealer Financing Terms

suggested little change over the past three months in

conditions in securities financing and over-the-

counter derivatives markets and in credit terms appli-

cable to most classes of counterparties.

Broad stock price indexes rose over the intermeeting

period, apparently boosted by a solid finish to the

corporate earnings season. Equity prices were also

supported by a broad increase in investors’ willing-

ness to take riskier positions, in part likely reflecting

an easing of concerns about EMEs early in the

period.

Credit flows to nonfinancial corporations remained

robust. Following a slowdown in January, nonfinan-

cial corporate bond issuance rebounded in February,

with the majority of proceeds going to investment-

grade firms. The growth of commercial and indus-

trial loans on banks’ balance sheets increased over

the period. Institutional issuance of leveraged loans

continued at a brisk pace.

Financing conditions in the commercial real estate

(CRE) sector continued to improve gradually. In the

fourth quarter, banks’ CRE loans increased across all

major loan categories, and CRE loans on banks’

books advanced at a solid pace in the first two

months of the year. Issuance of commercial

152 101st Annual Report | 2014

mortgage-backed securities was robust in February

after a slow start in January.

Conditions in the municipal bond market remained

favorable over the intermeeting period with the

spread of municipal yields over yields on

comparable-maturity Treasury securities little

changed. Although Puerto Rico’s general obligation

(GO) bonds were downgraded from investment grade

to speculative grade, prices of these bonds held

steady, albeit at depressed levels. Puerto Rico success-

fully brought to market a GO bond issue in early

March, substantially easing its near-term liquidity

pressures.

House prices registered a further notable rise in Janu-

ary. Mortgage interest rates and their spreads over

Treasury yields were little changed over the inter-

meeting period. Both mortgage applications for

home purchases and refinancing applications

remained at low levels through early March. Financ-

ing conditions in residential mortgage markets stayed

tight, even as further incremental signs of easing

emerged.

Conditions in consumer credit markets were still

mixed. Auto loans continued to be broadly available,

while credit card limits for borrowers with subprime

and prime credit scores remained at low levels in the

fourth quarter. Partly reflecting these conditions,

credit card balances stayed about flat through Janu-

ary, while auto and student loans continued to

expand briskly. Issuance of auto and credit card

asset-backed securities was robust again in January

and February.

Financial market sentiment abroad appeared to

improve over the period, particularly with respect to

the stresses that had developed in some EMEs just

prior to the January FOMC meeting. Although

global equity price indexes fell abruptly on March 3

amid the deepening of the political crisis in Ukraine,

most markets quickly retraced those losses. Consis-

tent with the general improvement in financial mar-

ket sentiment, most foreign currencies appreciated

against the dollar as flight-to-safety flows reversed.

One notable exception was the Chinese renminbi,

which depreciated against the dollar. The perfor-

mance of foreign equity price indexes was mixed, on

net: Stock prices rose in the EMEs, but they were flat

in Europe and declined substantially in Japan.

Longer-term sovereign bond yields in the advanced

economies fell modestly over the period.

Staff Economic Outlook

In the economic forecast prepared by the staff for the

March FOMC meeting, real GDP growth in the first

half of this year was somewhat lower than in the pro-

jection for the January meeting. The available read-

ings on consumer spending, residential construction,

and business investment pointed to less spending

growth in the first quarter than the staff had previ-

ously expected. The staff’s assessment was that the

unusually severe winter weather could account for

some, but not all, of the recent unanticipated weak-

ness in economic activity, and the staff lowered its

projection for near-term output growth. Largely

because of the combination of recent downward sur-

prises in the unemployment rate and weaker-than-

expected real GDP growth, the staff lowered slightly

the assumed pace of potential output growth in

recent years and over the projection period. As a

result, the staff’s medium-term forecast for real GDP

growth also was revised down slightly. Nevertheless,

the staff continued to project that real GDP would

expand at a faster pace over the next few years than it

did last year, and that real GDP growth would exceed

the growth rate of potential output. The faster pace

of real GDP growth was expected to be supported by

an easing in the restraint from changes in fiscal

policy, increases in consumer and business confi-

dence, further improvements in credit availability and

financial conditions, and a pickup in the rate of for-

eign economic growth. The expansion in economic

activity was anticipated to lead to a slow reduction in

resource slack over the projection period, and the

unemployment rate was expected to decline gradually

to the staff’s estimate of its longer-run natural rate.

The staff’s forecast for inflation was basically

unchanged from the projection prepared for the pre-

vious FOMC meeting. The staff continued to fore-

cast that inflation would stay below the Committee’s

longer-run objective of 2 percent over the next few

years. Inflation was projected to rise gradually

toward the Committee’s objective, as longer-run

inflation expectations were assumed to remain stable,

changes in commodity and import prices were

expected to be subdued, and slack in labor and prod-

uct markets was anticipated to diminish slowly.

The staff’s economic projections for the March meet-

ing were quite similar to its forecasts presented at the

December meeting when the FOMC last prepared a

Summary of Economic Projections (SEP). The

staff’s March projections for both real GDP growth

Minutes of Federal Open Market Committee Meetings | March 153

and the unemployment rate over the next few years

were just slightly lower than in its December fore-

casts, while the inflation projection was essentially

unchanged.

The staff viewed the extent of uncertainty around its

March projections for real GDP growth and the

unemployment rate as roughly in line with the aver-

age of the past 20 years. Nonetheless, the risks to the

forecast for real GDP growth were viewed as tilted a

little to the downside, especially because the economy

was not well positioned to withstand adverse shocks

while the target for the federal funds rate was at its

effective lower bound. At the same time, the staff

viewed the risks around its outlook for the unem-

ployment rate and for inflation as roughly balanced.

Participants’ Views on Current Conditions

and the Economic Outlook

In conjunction with this FOMC meeting, the meeting

participants—the 4 members of the Board of Gover-

nors and the presidents of the 12 Federal Reserve

Banks, all of whom participated in the delibera-

tions—submitted their assessments of real output

growth, the unemployment rate, inflation, and the

target federal funds rate for each year from 2014

through 2016 and over the longer run, under each

participant’s judgment of appropriate monetary

policy. The longer-run projections represent each

participant’s assessment of the rate to which each

variable would be expected to converge, over time,

under appropriate monetary policy and in the

absence of further shocks to the economy. These eco-

nomic projections and policy assessments are

described in the SEP, which is attached as an adden-

dum to these minutes.

In their discussion of the economic situation and the

outlook, participants generally noted that data

released since their January meeting had indicated

somewhat slower-than-expected growth in economic

activity during the winter months, in part reflecting

adverse weather conditions. Labor market indicators

were mixed. Inflation had continued to run below the

Committee’s longer-run objective, but longer-term

inflation expectations had remained stable. Several

participants indicated that recent economic news,

although leading them to mark down somewhat their

estimates of economic growth in late 2013 as well as

their assessments of likely growth in the first quarter

of 2014, had not prompted a significant revision of

their projections of moderate economic growth over

coming quarters.

Most participants noted that unusually severe winter

weather had held down economic activity during the

early months of the year. Business contacts in vari-

ous parts of the country reported a number of

weather-induced disruptions, including reduced

manufacturing activity due to lost workdays, inter-

ruptions to supply chains of inputs and delivery of

final products, and lower-than-expected retail sales.

Participants expected economic activity to pick up as

the weather-related disruptions to spending and pro-

duction dissipated. A few participants, however,

highlighted factors other than weather that had likely

contributed to the slowdown during the first quarter,

including slower growth in net exports following its

unusually large positive contribution to growth in the

fourth quarter of 2013. Moreover, it was noted that

some of the pickup in economic growth that had

appeared to have been indicated by the data available

at the January meeting had been reversed by subse-

quent data revisions. For many participants, the out-

look for economic activity over coming quarters had

changed little, on balance, since the time of the

December meeting.

Housing activity remained slow over the intermeeting

period. Although unfavorable weather had contrib-

uted to the recent disappointing performance of

housing, a few participants suggested that last year’s

rise in mortgage interest rates might have produced a

larger-than-expected reduction in home sales. In

addition, it was noted that the return of house prices

to more-normal levels could be damping the pace of

the housing recovery, and that home affordability has

been reduced for some prospective buyers. Slackening

demand from institutional investors was cited as

another factor behind the decline in home sales.

Nonetheless, the underlying fundamentals, including

population growth and household formation, were

viewed as pointing to a continuing recovery of the

housing market.

In their discussion of labor market developments,

participants noted further improvement, on balance,

in labor market conditions. The unemployment rate

had moved down in recent months, as had broader

measures of unemployment and underemployment.

Other labor market indicators, such as payrolls and

hiring and quit rates, while not all showing the same

extent of improvement, also pointed to ongoing

gains in labor markets. Going forward, participants

continued to expect a gradual decline in the unem-

ployment rate over the medium term, with judgments

differing somewhat across participants about the

likely pace of the decline. It was also noted that

154 101st Annual Report | 2014

uncertainty about the trend rate of productivity

growth was making it difficult to ascertain the rate of

real GDP growth that would be associated with prog-

ress in reducing the unemployment rate.

While there was general agreement that slack remains

in the labor market, participants expressed a range of

views regarding the amount of slack and how well

the unemployment rate performs as a summary indi-

cator of labor market conditions. Several participants

pointed to a number of factors—including the low

labor force participation rate and the still-high rates

of longer-duration unemployment and of workers

employed part time for economic reasons—as sug-

gesting that there might be considerably more labor

market slack than indicated by the unemployment

rate alone. A couple of other participants, however,

saw reasons to believe that slack was more limited,

viewing the decline in the participation rate as pri-

marily reflecting demographic trends with little role

for cyclical factors and observing that broader meas-

ures of unemployment had registered declines in the

past year that were comparable with the decline in

the standard measure. Several participants cited low

nominal wage growth as pointing to the existence of

continued labor market slack. Participants also noted

the debate in the research literature and elsewhere

concerning whether long-term unemployment differs

materially from short-term unemployment in its

implications for wage and price pressures.

Inflation continued to run below the Committee’s

2 percent longer-run objective over the intermeeting

period. A couple of participants expressed concern

that inflation might not return to 2 percent in the

next few years and suggested that a protracted period

of inflation below 2 percent raised questions about

whether the Committee was providing an appropriate

degree of monetary accommodation. One of these

participants suggested that persistently low inflation

was a clear reflection of a sizable shortfall of

employment from its maximum level. A number of

participants noted that a pickup in nominal wage

growth would be consistent with labor market condi-

tions moving closer to normal and would support the

return of consumer price inflation to the Commit-

tee’s 2 percent longer-run goal. However, a couple of

other participants suggested that factors other than

economic slack had played a notable role in holding

down inflation of late, including unusually slow

growth in prices of medical services. Most partici-

pants expected inflation to return to 2 percent over

the next few years, supported by stable inflation

expectations and the continued gradual recovery in

economic activity.

Several participants pointed to international develop-

ments that bear watching. It was suggested that

slower growth in China had likely already put some

downward pressure on world commodity prices, and

a couple of participants observed that a larger-than-

expected slowdown in economic growth in China

could have adverse implications for global economic

growth. In addition, it was noted that events in

Ukraine were likely to have little direct effect on the

U.S. economic outlook but might have negative

implications for global growth if they escalated and

led to a protracted period of geopolitical tensions in

that region.

In their discussion of recent financial developments,

participants saw financial conditions as generally

consistent with the Committee’s policy intentions.

However, several participants mentioned trends that,

if continued, could become a concern from the per-

spective of financial stability. A couple of partici-

pants pointed to the decline in credit spreads to rela-

tively low levels by historical standards; one of these

participants noted the risk of either a sharp rise in

spreads, which could have negative repercussions for

aggregate demand, or a continuation of the decline in

spreads, which could undermine financial stability

over time. One participant voiced concern about high

levels of margin debt and of equity market valuations

as well as a notable shift into commodity invest-

ments. Another participant stressed the growth in

consumer credit to less credit-worthy households.

In their discussion of monetary policy going for-

ward, participants focused primarily on possible

changes to the Committee’s forward guidance for the

federal funds rate. Almost all participants agreed that

it was appropriate at this meeting to update the for-

ward guidance, in part because the unemployment

rate was seen as likely to fall below its 6½ percent

threshold value before long. Most participants pre-

ferred replacing the numerical thresholds with a

qualitative description of the factors that would

influence the Committee’s decision to begin raising

the federal funds rate. One participant, however,

favored retaining the existing threshold language on

the grounds that removing it before the unemploy-

ment rate reached 6½ percent could be misinter-

preted as a signal that the path of policy going for-

ward would be less accommodative. Another partici-

pant favored introducing new quantitative thresholds

Minutes of Federal Open Market Committee Meetings | March 155

of 5½ percent for the unemployment rate and

2¼ percent for projected inflation. A few participants

proposed adding new language in which the Commit-

tee would indicate its willingness to keep rates low if

projected inflation remained persistently below the

Committee’s 2 percent longer-run objective; these

participants suggested that the inclusion of this

quantitative element in the forward guidance would

demonstrate the Committee’s commitment to defend

its inflation objective from below as well as from

above. Other participants, however, judged that it was

already well understood that the Committee recog-

nizes that inflation persistently below its 2 percent

objective could pose risks to economic performance.

Most participants therefore did not favor adding new

quantitative language, preferring to shift to qualita-

tive language that would describe the Committee’s

likely reaction to the state of the economy.

Most participants also believed that, as part of the

process of clarifying the Committee’s future policy

intentions, it would be appropriate at this time for the

Committee to provide additional guidance in its post-

meeting statement regarding the likely behavior of

the federal funds rate after its first increase. For

example, the statement could indicate that the Com-

mittee currently anticipates that, even after employ-

ment and inflation are near mandate-consistent lev-

els, economic conditions may, for some time, warrant

keeping the target federal funds rate below levels the

Committee views as normal in the longer run. Par-

ticipants observed that a number of factors were

likely to have contributed to a persistent decline in

the level of interest rates consistent with attaining

and maintaining the Committee’s objectives. In par-

ticular, participants cited higher precautionary sav-

ings by U.S. households following the financial crisis,

higher global levels of savings, demographic changes,

slower growth in potential output, and continued

restraint on the availability of credit. A few partici-

pants suggested that new language along these lines

could instead be introduced when the first increase in

the federal funds rate had drawn closer or after the

Committee had further discussed the reasons for

anticipating a relatively low federal funds rate during

the period of policy firming. A number of partici-

pants noted the overall upward shift since December

in participants’ projections of the federal funds rate

included in the March SEP, with some expressing

concern that this component of the SEP could be

misconstrued as indicating a move by the Committee

to a less accommodative reaction function. However,

several participants noted that the increase in the

median projection overstated the shift in the projec-

tions. In addition, a number of participants observed

that an upward shift was arguably warranted by the

improvement in participants’ outlooks for the labor

market since December and therefore need not be

viewed as signifying a less accommodative reaction

function. Most participants favored providing an

explicit indication in the statement that the new for-

ward guidance, taken as a whole, did not imply a

change in the Committee’s policy intentions, on the

grounds that such an indication could help forestall

misinterpretation of the new forward guidance.

Committee Policy Action

Committee members saw the information received

over the intermeeting period as indicating that

growth in economic activity slowed during the winter

months, in part reflecting adverse weather conditions.

Labor market indicators were mixed but on balance

showed further improvement. The unemployment

rate, however, remained elevated when judged against

members’ estimates of the longer-run normal rate of

unemployment. Household spending and business

fixed investment continued to advance, while the

recovery in the housing sector remained slow. Fiscal

policy was restraining economic growth, although the

extent of restraint had diminished. The Committee

expected that, with appropriate policy accommoda-

tion, the economy would expand at a moderate pace

and labor market conditions would continue to

improve gradually, moving toward those the Com-

mittee judges consistent with the dual mandate.

Moreover, members judged that the risks to the out-

look for the economy and the labor market were

nearly balanced. Inflation was running below the

Committee’s longer-run objective, and this was seen

as posing possible risks to economic performance,

but members anticipated that stable inflation expec-

tations and strengthening economic activity would,

over time, return inflation to the Committee’s 2 per-

cent objective. However, in light of their concerns

about the possible persistence of low inflation, mem-

bers agreed that inflation developments should be

monitored carefully for evidence that inflation was

moving back toward the Committee’s longer-run

objective.

In their discussion of monetary policy in the period

ahead, members agreed that there was sufficient

underlying strength in the broader economy to sup-

port ongoing improvement in labor market condi-

tions. In light of the cumulative progress toward

maximum employment and the improvement in the

outlook for labor market conditions since the incep-

156 101st Annual Report | 2014

tion of the current asset purchase program, members

decided that it would be appropriate to make a fur-

ther measured reduction in the pace of its asset pur-

chases at this meeting. Members again judged that, if

the economy continued to develop as anticipated, the

Committee would likely reduce the pace of asset pur-

chases in further measured steps at future meetings.

Members also underscored that the pace of asset

purchases was not on a preset course and would

remain contingent on the Committee’s outlook for

the labor market and inflation as well as its assess-

ment of the likely efficacy and costs of purchases.

Accordingly, the Committee agreed that, beginning

in April, it would add to its holdings of agency

mortgage-backed securities at a pace of $25 billion

per month rather than $30 billion per month, and

would add to its holdings of longer-term Treasury

securities at a pace of $30 billion per month rather

than $35 billion per month. While making a further

measured reduction in its pace of purchases, the

Committee emphasized that its holdings of longer-

term securities were sizable and would still be

increasing, which would promote a stronger eco-

nomic recovery by maintaining downward pressure

on longer-term interest rates, supporting mortgage

markets, and helping to make broader financial con-

ditions more accommodative. The Committee also

reiterated that it would continue its asset purchases,

and employ its other policy tools as appropriate, until

the outlook for the labor market has improved sub-

stantially in a context of price stability. One member,

while concurring with this policy action, suggested

that in future statements the Committee might pro-

vide further information about the trajectory of the

Federal Reserve’s balance sheet, including informa-

tion about when the Committee might discontinue its

policy of reinvesting principal payments on all

agency debt and agency mortgage-backed securities

in agency mortgage-backed securities.

With respect to forward guidance about the federal

funds rate, all members judged that, as the unemploy-

ment rate was likely to fall below 6½ percent before

long, it was appropriate to replace the existing quan-

titative thresholds at this meeting. Almost all mem-

bers judged that the new language should be qualita-

tive in nature and should indicate that, in determin-

ing how long to maintain the current 0 to ¼ percent

target range for the federal funds rate, the Committee

would assess progress, both realized and expected,

toward its objectives of maximum employment and

2 percent inflation. However, a couple of members

preferred to include language in the statement indi-

cating that the Committee would keep rates low if

projected inflation remained persistently below the

Committee’s 2 percent longer-run objective. One of

these members argued that the Committee should

continue to provide quantitative thresholds for both

the unemployment rate and inflation.

Members also considered statement language that

would provide information about the anticipated

behavior of the federal funds rate once it is raised

above its effective lower bound. The Committee

decided that it was appropriate to add language indi-

cating that the Committee currently anticipates that,

even after employment and inflation are near

mandate-consistent levels, economic conditions may,

for some time, warrant keeping the target federal

funds rate below levels the Committee views as nor-

mal in the longer run. In discussing this addition, a

couple of members suggested that language along

these lines might better be introduced at a later meet-

ing. However, another member indicated that adding

the new language at this stage could be beneficial for

the effectiveness of policy because financial condi-

tions depend on both the length of time that the fed-

eral funds rate is at the effective lower bound and on

the expected path that the federal funds rate will fol-

low once policy fir ming begins. It was also noted that

the postmeeting statements, rather than the SEP, pro-

vide the public with information on the Committee’s

monetary policy decisions and that it was therefore

appropriate for the postmeeting statement to convey

the Committee’s position on the likely future behav-

ior of the federal funds rate.

At the conclusion of the discussion, the Committee

voted to authorize and direct the Federal Reserve

Bank of New York, until it was instructed otherwise,

to execute transactions in the SOMA in accordance

with the following domestic policy directive:

“Consistent with its statutory mandate, the Fed-

eral Open Market Committee seeks monetary

and financial conditions that will foster maxi-

mum employment and price stability. In particu-

lar, the Committee seeks conditions in reserve

markets consistent with federal funds trading in

a range from 0 to ¼ percent. The Committee

directs the Desk to undertake open market

operations as necessary to maintain such condi-

tions. Beginning in April, the Desk is directed to

purchase longer-term Treasury securities at a

pace of about $30 billion per month and to pur-

chase agency mortgage-backed securities at a

pace of about $25 billion per month. The Com-

mittee also directs the Desk to engage in dollar

Minutes of Federal Open Market Committee Meetings | March 157

roll and coupon swap transactions as necessary

to facilitate settlement of the Federal Reserve’s

agency mortgage-backed securities transactions.

The Committee directs the Desk to maintain its

policy of rolling over maturing Treasury securi-

ties into new issues and its policy of reinvesting

principal payments on all agency debt and

agency mortgage-backed securities in agency

mortgage-backed securities. The System Open

Market Account Manager and the Secretary will

keep the Committee informed of ongoing devel-

opments regarding the System’s balance sheet

that could affect the attainment over time of the

Committee’s objectives of maximum employ-

ment and price stability.”

The vote encompassed approval of the statement

below to be released at 2:00 p.m.:

“Information received since the Federal Open

Market Committee met in January indicates that

growth in economic activity slowed during the

winter months, in part reflecting adverse

weather conditions. Labor market indicators

were mixed but on balance showed further

improvement. The unemployment rate, however,

remains elevated. Household spending and busi-

ness fixed investment continued to advance,

while the recovery in the housing sector

remained slow. Fiscal policy is restraining eco-

nomic growth, although the extent of restraint is

diminishing. Inflation has been running below

the Committee’s longer-run objective, but

longer-term inflation expectations have

remained stable.

Consistent with its statutory mandate, the Com-

mittee seeks to foster maximum employment

and price stability. The Committee expects that,

with appropriate policy accommodation, eco-

nomic activity will expand at a moderate pace

and labor market conditions will continue to

improve gradually, moving toward those the

Committee judges consistent with its dual man-

date. The Committee sees the risks to the out-

look for the economy and the labor market as

nearly balanced. The Committee recognizes that

inflation persistently below its 2 percent objec-

tive could pose risks to economic performance,

and it is monitoring inflation developments care-

fully for evidence that inflation will move back

toward its objective over the medium term.

The Committee currently judges that there is

sufficient underlying strength in the broader

economy to support ongoing improvement in

labor market conditions. In light of the cumula-

tive progress toward maximum employment and

the improvement in the outlook for labor market

conditions since the inception of the current

asset purchase program, the Committee decided

to make a further measured reduction in the

pace of its asset purchases. Beginning in April,

the Committee will add to its holdings of agency

mortgage-backed securities at a pace of $25 bil-

lion per month rather than $30 billion per

month, and will add to its holdings of longer-

term Treasury securities at a pace of $30 billion

per month rather than $35 billion per month.

The Committee is maintaining its existing policy

of reinvesting principal payments from its hold-

ings of agency debt and agency mortgage-

backed securities in agency mortgage-backed

securities and of rolling over maturing Treasury

securities at auction. The Committee’s sizable

and still-increasing holdings of longer-term

securities should maintain downward pressure

on longer-term interest rates, support mortgage

markets, and help to make broader financial

conditions more accommodative, which in turn

should promote a stronger economic recovery

and help to ensure that inflation, over time, is at

the rate most consistent with the Committee’s

dual mandate.

The Committee will closely monitor incoming

information on economic and financial develop-

ments in coming months and will continue its

purchases of Treasury and agency mortgage-

backed securities, and employ its other policy

tools as appropriate, until the outlook for the

labor market has improved substantially in a

context of price stability. If incoming informa-

tion broadly supports the Committee’s expecta-

tion of ongoing improvement in labor market

conditions and inflation moving back toward its

longer-run objective, the Committee will likely

reduce the pace of asset purchases in further

measured steps at future meetings. However,

asset purchases are not on a preset course, and

the Committee’s decisions about their pace will

remain contingent on the Committee’s outlook

for the labor market and inflation as well as its

assessment of the likely efficacy and costs of

such purchases.

158 101st Annual Report | 2014

To support continued progress toward maxi-

mum employment and price stability, the Com-

mittee today reaffirmed its view that a highly

accommodative stance of monetary policy

remains appropriate. In determining how long to

maintain the current 0 to ¼ percent target range

for the federal funds rate, the Committee will

assess progress—both realized and expected—

toward its objectives of maximum employment

and 2 percent inflation. This assessment will take

into account a wide range of information,

including measures of labor market conditions,

indicators of inflation pressures and inflation

expectations, and readings on financial develop-

ments. The Committee continues to anticipate,

based on its assessment of these factors, that it

likely will be appropriate to maintain the current

target range for the federal funds rate for a con-

siderable time after the asset purchase program

ends, especially if projected inflation continues

to run below the Committee’s 2 percent longer-

run goal, and provided that longer-term infla-

tion expectations remain well anchored.

When the Committee decides to begin to remove

policy accommodation, it will take a balanced

approach consistent with its longer-run goals of

maximum employment and inflation of 2 per-

cent. The Committee currently anticipates that,

even after employment and inflation are near

mandate-consistent levels, economic conditions

may, for some time, warrant keeping the target

federal funds rate below levels the Committee

views as normal in the longer run.

With the unemployment rate nearing 6½ per-

cent, the Committee has updated its forward

guidance. The change in the Committee’s guid-

ance does not indicate any change in the Com-

mittee’s policy intentions as set forth in its

recent statements.”

Voting for this action: Janet L. Yellen, William C.

Dudley, Richard W. Fisher, Sandra Pianalto, Charles

I. Plosser, Jerome H. Powell, Jeremy C. Stein, and

Daniel K. Tarullo.

Voting against this action: Narayana Kocherlakota.

Mr. Kocherlakota dissented because, in his view, the

new forward guidance in the f ifth paragraph of the

statement would weaken the credibility of the Com-

mittee’s commitment to its inflation goal by failing to

communicate purposeful steps to more rapidly

increase inflation to the 2 percent target and by sug-

gesting that the Committee views inflation persis-

tently below 2 percent as an acceptable outcome.

Moreover, he judged that the new guidance would act

as a drag on economic activity because it provided

little information about the desired rate of progress

toward maximum employment and no quantitative

measure of what constitutes maximum employment,

and thus would generate uncertainty about the extent

to which the Committee is willing to use monetary

stimulus to foster faster growth. Mr. Kocherlakota

strongly endorsed the sixth paragraph of the state-

ment because providing information about the Com-

mittee’s intentions for the federal funds rate once

employment and inflation are near mandate-

consistent levels should help stimulate economic

activity by reducing uncertainty.

It was agreed that the next meeting of the Committee

would be held on Tuesday–Wednesday, April 29–30,

2014. The meeting adjourned at 10:05 a.m. on

March 19, 2014.

Notation Vote

By notation vote completed on February 18, 2014,

the Committee unanimously approved the minutes of

the Committee meeting held on January 28–29, 2014.

Videoconference meeting of March 4

The Committee met by videoconference on March 4,

2014, to discuss issues associated with its forward

guidance for the federal funds rate. The Committee

discussed possible changes to its forward guidance

that could provide additional information about the

factors likely to enter its decisions regarding the fed-

eral funds rate target as the unemployment rate

approached its 6½ percent threshold and once that

threshold was crossed. The agenda did not contem-

plate any policy decisions, and none were taken.

Many participants noted that market expectations of

the future course of the federal funds rate were cur-

rently reasonably well aligned with those of policy-

makers, and that a sizable change to the forward

guidance could disturb this alignment. Nonetheless,

participants generally saw the Committee’s upcoming

meeting as an opportune occasion for a reformula-

tion of the guidance language; one of these partici-

pants suggested that the reformulation could be

accompanied by a statement that the new language

was intended to be consistent with current market

expectations. A few participants stressed that the

Minutes of Federal Open Market Committee Meetings | March 159

Committee had several other vehicles, including the

Chair’s postmeeting press conference, through which

it could clarify its future policy intentions.

Participants agreed that the existing forward guid-

ance, with its reference to a 6½ percent threshold for

the unemployment rate, was becoming outdated as

the unemployment rate continued its expected

gradual decline. Most participants felt that the quan-

titative thresholds had been very useful in communi-

cating policy intentions when employment was far

from mandate-consistent levels, but, with the

economy having moved appreciably closer to maxi-

mum employment, the forward guidance should

emphasize that the Committee is focusing more on a

broader set of economic indicators. Thus, most par-

ticipants felt that quantitative thresholds, triggers, or

floors should not be a part of future statement lan-

guage, with a number of participants noting the

uncertainty associated with defining and measuring

the unemployment rate and the level of employment

that would be most consistent with the Committee’s

maximum employment objective, or other similar

concepts. These participants generally favored quali-

tative language describing the economic factors that

would influence the Committee’s decision regarding

the first increase in the federal funds rate target. Par-

ticipants put forward a number of suggestions for

such qualitative language. One participant favored

linking the length of time that the federal funds rate

would remain at the lower bound to the period over

which complete recovery of the labor market was

projected to occur, while another advocated qualita-

tive forward guidance expressed in terms of the

Committee’s projections of real output growth, argu-

ing that such an approach would avoid the uncertain-

ties associated with estimates of potential output or

maximum employment. Yet another participant

argued that it would be desirable for the statement to

describe the Committee’s reasons for keeping the fed-

eral funds rate at the lower bound when standard

policy rules were prescribing that the rate should be

increased and noted that one possible reason for

doing so is that the effective lower bound on the fed-

eral funds rate limits the Committee’s scope to pro-

vide accommodation in response to adverse shocks.

In contrast, some participants expressed a preference

for quantitative guidance. A few participants saw

merit in stating explicitly that the Committee would

provide accommodation to the extent necessary to

prevent inflation from running persistently below its

2 percent longer-run goal. One of these participants

argued that such forward guidance would strengthen

the credibility of the Committee’s inflation objective

as well as encourage employment outcomes that were

most consistent with the Committee’s other objective

of maximum employment. Another participant sug-

gested that the Committee state that it would adjust

policy to keep projected inflation near 2 percent over

the medium term, and that it would balance devia-

tions from its objectives in the near term. Still

another participant expressed a preference for stating

explicit quantitative criteria for some labor market

variable or variables.

Most participants favored providing information

about the likely behavior of the federal funds rate

after its first increase. A few participants, however,

viewed the period of policy firming as likely to be far

enough in the future that the Committee did not

need to provide such information at this stage.

Committee participants also considered whether

revised forward guidance should include a more

prominent mention of financial developments or of

potential risks to financial stability. Most participants

felt that the Committee’s monitoring of financial

conditions and of risks to financial stability was

already well understood by markets and that, while

some reference to financial developments might use-

fully be included in the statement, a lengthy addition

did not seem necessary. One participant favored

including a reference in the statement to “financial

conditions,” rather than “financial stability,” empha-

sizing that, when factors other than monetary policy

induce a change in financial conditions, the Commit-

tee may need to take that change in financial condi-

tions into account when making its monetary policy

decisions.

William B. English

Secretary

160 101st Annual Report | 2014

Addendum:

Summary of Economic Projections

In conjunction with the March 18–19, 2014, Federal

Open Market Committee (FOMC) meeting, meeting

participants—the 4 members of the Board of Gover-

nors and the 12 presidents of the Federal Reserve

Banks, all of whom participated in the delibera-

tions—submitted their assessments of real output

growth, the unemployment rate, inflation, and the

target federal funds rate for each year from 2014

through 2016 and over the longer run. Each partici-

pant’s assessment was based on information available

at the time of the meeting plus his or her judgment of

appropriate monetary policy and assumptions about

the factors likely to affect economic outcomes. The

longer-run projections represent each participant’s

judgment of the value to which each variable would

be expected to converge, over time, under appropriate

monetary policy and in the absence of further shocks

to the economy. “Appropriate monetary policy” is

defined as the future path of policy that each partici-

pant deems most likely to foster outcomes for eco-

nomic activity and inflation that best satisfy his or

her individual interpretation of the Federal Reserve’s

objectives of maximum employment and stable

prices.

Overall, FOMC participants expected that, under

appropriate monetary policy, economic growth

would pick up this year and next, before moving

down a bit but remaining above its longer-run rate in

2016, and that the unemployment rate would decline

gradually toward its longer-run normal level over the

projection period (

table 1 and figure 1). Almost all of

the participants projected that inflation, as measured

by the annual change in the price index for personal

consumption expenditures (PCE), would rise steadily

to a level at or slightly below the Committee’s 2 per-

cent objective in 2016.

Most participants expected that highly accommoda-

tive monetary policy would remain warranted over

the next few years to foster progress toward the Fed-

eral Reserve’s longer-run objectives. As shown in

fig-

ure 2

, all but one of the participants projected that it

would be appropriate to wait until 2015 or later

before beginning to increase the federal funds rate,

and a large majority projected that it would then be

appropriate to raise the target federal funds rate

fairly gradually. Almost all participants viewed

appropriate policy as broadly consistent with contin-

ued gradual slowing in the pace of the Committee’s

purchases of longer-term securities and the comple-

tion of the program in the second half of this year.

Most participants saw the uncertainty associated

with their outlooks for economic growth and the

unemployment rate as similar to that of the past

20 years, and a majority saw the uncertainty associ-

ated with their projections for inflation as similar to

that of the past 20 years. In addition, most partici-

pants considered the risks to the outlook for real

Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, March 2014

Percent

Variable

Central tendency

Range

2014 2015 2016 Longer run 2014 2015 2016 Longer run

Change in real GDP 2.8 to 3.0 3.0 to 3.2 2.5 to 3.0 2.2 to 2.3 2.1 to 3.0 2.2 to 3.5 2.2 to 3.4 1.8 to 2.4

December projection 2.8 to 3.2 3.0 to 3.4 2.5 to 3.2 2.2 to 2.4 2.2 to 3.3 2.2 to 3.6 2.1 to 3.5 1.8 to 2.5

Unemployment rate 6.1 to 6.3 5.6 to 5.9 5.2 to 5.6 5.2 to 5.6 6.0 to 6.5 5.4 to 5.9 5.1 to 5.8 5.2 to 6.0

December projection 6.3 to 6.6 5.8 to 6.1 5.3 to 5.8 5.2 to 5.8 6.2 to 6.7 5.5 to 6.2 5.0 to 6.0 5.2 to 6.0

PCE inflation 1.5 to 1.6 1.5 to 2.0 1.7 to 2.0 2.0 1.3 to 1.8 1.5 to 2.4 1.6 to 2.0 2.0

December projection 1.4 to 1.6 1.5 to 2.0 1.7 to 2.0 2.0 1.3 to 1.8 1.4 to 2.3 1.6 to 2.2 2.0

Core PCE inflation

1.4 to 1.6 1.7 to 2.0 1.8 to 2.0 1.3 to 1.8 1.5 to 2.4 1.6 to 2.0

December projection 1.4 to 1.6 1.6 to 2.0 1.8 to 2.0 1.3 to 1.8 1.5 to 2.3 1.6 to 2.2

Note: Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are from the fourth quarter of the previous year to the fourth

quarter of the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index for personal consumption expenditures

(PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the

year indicated. Each participant’s projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each participant’s

assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy. The

December projections were made in conjunction with the meeting of the Federal Open Market Committee on December 17–18, 2013.

The central tendency excludes the three highest and three lowest projections for each variable in each year.

The range for a variable in a given year includes all participants’ projections, from lowest to highest, for that variable in that year.

Longer-run projections for core PCE inflation are not collected.

Minutes of Federal Open Market Committee Meetings | March 161

Figure 1. Central tendencies and ranges of economic projections, 2014–16 and over the longer run

Change in real GDP

2009 2010 2011 2012 2013 2014 2015 2016 Longer

run

Central tendency of projections

Range of projections

Actual

Unemployment rate

2009 2010 2011 2012 2013 2014 2015 2016 Longer

run

PCE ination

2009 2010 2011 2012 2013 2014 2015 2016 Longer

run

Core PCE ination

Percent

2009 2010 2011 2012 2013 2014 2015 2016 Longer

run

Note: Definitions of variables are in the general note to table 1. The data for the actual values of the variables are annual.

162 101st Annual Report | 2014

Figure 2. Overview of FOMC participants’ assessments of appropriate monetary policy

Appropriate timing of policy rming

Number of participants

2014 2015 2016

Appropriate pace of policy rming

Percent

Target federal funds rate at year-end

2014 2015 2016 Longer run

Note: In the upper panel, the height of each bar denotes the number of FOMC participants who judge that, under appropriate monetary policy, the first increase in the target fed-

eral funds rate from its current range of 0 to ¼ percent will occur in the specified calendar year. In December 2013, the numbers of FOMC participants who judged that the first

increase in the target federal funds rate would occur in 2014, 2015, and 2016 were, respectively, 2, 12, and 3. In the lower panel, each shaded circle indicates the value

(rounded to the nearest ¼ percentage point) of an individual participant’s judgment of the appropriate level of the target federal funds rate at the end of the specified calendar

year or over the longer run.

Minutes of Federal Open Market Committee Meetings | March 163

gross domestic product (GDP), the unemployment

rate, and inflation to be broadly balanced, although

some saw the risks to their inflation forecasts as tilted

to the downside.

The Outlook for Economic Activity

Participants generally projected that, conditional on

their individual assumptions about appropriate mon-

etary policy, real GDP growth would pick up gradu-

ally this year and next to a pace somewhat exceeding

their estimates of the longer-run normal rate of out-

put growth. Subsequently, in 2016, real GDP growth

was projected to begin to move back toward its

longer-run rate. Most participants revised down a bit

their projections of real GDP growth for 2014, com-

pared with their projections in December 2013, and

the top end of the central tendencies for output

growth in each year and over the longer run moved

down slightly. Nonetheless, participants pointed to a

number of factors that they expected would contrib-

ute to a pickup in economic growth this year, such as

an easing of the headwinds that have been weighing

on growth, including diminished restraint from fiscal

policy; rising household net worth and highly accom-

modative monetary policy also were expected to con-

tribute. In addition, many attributed some of the

softness in recent economic data to the transitory

effects of unusually severe winter weather. The cen-

tral tendencies of participants’ projections for real

GDP growth were 2.8 to 3.0 percent in 2014, 3.0 to

3.2 percent in 2015, and 2.5 to 3.0 percent in 2016.

The central tendency for the longer-run normal rate

of growth of real GDP was 2.2 to 2.3 percent.

Participants anticipated a gradual decline in the

unemployment rate over the projection period. The

central tendencies of participants’ forecasts for the

unemployment rate in the fourth quarter of each

year were 6.1 to 6.3 percent in 2014, 5.6 to 5.9 per-

cent in 2015, and 5.2 to 5.6 percent in 2016. Nearly

all participants revised down their projected paths for

the unemployment rate relative to their December

projections, with some pointing to the decline in the

unemployment rate in recent months. The central

tendency of participants’ estimates of the longer-run

normal rate of unemployment that would prevail

under appropriate monetary policy and in the

absence of further shocks to the economy also moved

lower, to 5.2 to 5.6 percent. A majority of partici-

pants projected that the unemployment rate would be

close to their individual estimates of its longer-run

level at the end of 2016.

Figures 3.A and 3.B show that participants contin-

ued to hold a range of views regarding the likely out-

comes for real GDP growth and the unemployment

rate over the next two years. The diversity of views

reflected their individual assessments of the rate at

which the headwinds that have been holding back the

pace of the economic recovery would abate, the

anticipated path for foreign economic activity, the

trajectory for growth in household net worth, and the

appropriate path of monetary policy. Relative to

December, the dispersions of participants’ projec-

tions for real GDP growth and the unemployment

rate over the period from 2014 to 2016 narrowed

slightly.

The Outlook for Inflation

Participants’ views on the broad outlook for inflation

under the assumption of appropriate monetary

policy were nearly unchanged, on balance, from

those in their December projections. All participants

anticipated that, on average, both headline and core

inflation would rise gradually over the next few years,

and a large majority of participants expected head-

line inflation to be at or slightly below the Commit-

tee’s 2 percent objective in 2016. Specifically, the cen-

tral tendencies for PCE inflation were 1.5 to 1.6 per-

cent in 2014, 1.5 to 2.0 percent in 2015, and 1.7 to

2.0 percent in 2016. The central tendencies of the

forecasts for core inflation were broadly similar to

those for the headline measure. A number of partici-

pants viewed the combination of stable inflation

expectations and steadily diminishing resource slack

as likely to contribute to a gradual rise of inflation

back toward the Committee’s longer-run objective.

Figures 3.C and 3.D provide information on the

diversity of participants’ views about the outlook for

inflation. The ranges of participants’ projections for

overall inflation were little changed relative to

December. The forecasts for PCE inflation in 2016

were at or below the Committee’s longer-run objec-

tive. Similar to the projections for headline inflation,

the projections for core inflation in 2016 were also

concentrated near 2 percent.

Appropriate Monetary Policy

As indicated in figure 2, most participants judged

that very low levels of the federal funds rate would

remain appropriate for the next few years. In particu-

lar, 13 participants thought that the first increase in

the target federal funds rate would not be warranted

until sometime in 2015, and two judged that policy

164 101st Annual Report | 2014

Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2014–16 and over the longer run

2014

Number of participants

1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6

- - - - - - - - - -

1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7

Percent range

March projections

December projections

2015

1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6

- - - - - - - - - -

1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7

2016

1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6

- - - - - - - - - -

1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7

Longer run

1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6

- - - - - - - - - -

1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7

Note: Definitions of variables are in the general note to table 1.

Minutes of Federal Open Market Committee Meetings | March 165

Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2014–16 and over the longer run

2014

5.0 5.2 5.4 5.6 5.8 6.0 6.2 6.4 6.6

- - - - - - - - -

5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7

March projections

December projections

2015

5.0 5.2 5.4 5.6 5.8 6.0 6.2 6.4 6.6

- - - - - - - - -

5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7

2016

5.0 5.2 5.4 5.6 5.8 6.0 6.2 6.4 6.6

- - - - - - - - -

5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7

Longer run

5.0 5.2 5.4 5.6 5.8 6.0 6.2 6.4 6.6

- - - - - - - - -

5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7

Number of participants

Percent range

Note: Definitions of variables are in the general note to table 1.

166 101st Annual Report | 2014

Figure 3.C. Distribution of participants’ projections for PCE inflation, 2014–16 and over the longer run

2014

1.3 1.5 1.7 1.9 2.1 2.3

- - - - - -

1.4 1.6 1.8 2.0 2.2 2.4

March projections

December projections

2015

1.3 1.5 1.7 1.9 2.1 2.3

- - - - - -

1.4 1.6 1.8 2.0 2.2 2.4

2016

1.3 1.5 1.7 1.9 2.1 2.3

- - - - - -

1.4 1.6 1.8 2.0 2.2 2.4

Longer run

1.3 1.5 1.7 1.9 2.1 2.3

- - - - - -

1.4 1.6 1.8 2.0 2.2 2.4

Number of participants

Percent range

Note: Definitions of variables are in the general note to table 1.

Minutes of Federal Open Market Committee Meetings | March 167

Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2014–16

2014

1.3 1.5 1.7 1.9 2.1 2.3

- - - - - -

1.4 1.6 1.8 2.0 2.2 2.4

March projections

December projections

2015

1.3 1.5 1.7 1.9 2.1 2.3

- - - - - -

1.4 1.6 1.8 2.0 2.2 2.4

2016

1.3 1.5 1.7 1.9 2.1 2.3

- - - - - -

1.4 1.6 1.8 2.0 2.2 2.4

Number of participants

Percent range

Note: Definitions of variables are in the general note to table 1.

168 101st Annual Report | 2014

firming would likely not be appropriate until 2016.

Only one participant thought that an increase in the

federal funds rate would be appropriate in 2014.

All participants but one projected that the unemploy-

ment rate would be below 6 percent at the end of the

year in which they currently anticipate that it will

become appropriate to raise the federal funds rate

above its effective lower bound. Moreover, all but one

projected that inflation would be at or below the

Committee’s longer-run objective at that time. Most

participants projected that the unemployment rate

would remain above their estimates of its longer-run

normal level at the end of the year in which they saw

the federal funds rate increasing from its effective

lower bound.

Figure 3.E provides the distribution of participants’

judgments regarding the appropriate level of the tar-

get federal funds rate at the end of each calendar year

from 2014 to 2016 and over the longer run. As noted

earlier, almost all participants judged that economic

conditions would warrant maintaining the current

exceptionally low level of the federal funds rate until

2015. The median value of the rate at the end of 2015

and 2016 increased 25 and 50 basis points, respec-

tively, since December, while the mean values

increased 7 and 25 basis points, respectively. The dis-

persion of projections for the value of the federal

funds rate in each year narrowed slightly. Almost all

participants expected that the federal funds rate at

the end of 2016 would still be below their individual

assessments of its longer-run level, with many point-

ing to subdued inflation pressures, below-mandate

inflation, the still-noticeable effects of headwinds, or

the need to maintain low rates to support the recov-

ery as reasons to keep the federal funds rate low at

that time. Estimates of the longer-run target for the

federal funds rate ranged from 3½ to about 4¼ per-

cent, reflecting the Committee’s inflation objective of

2 percent and participants’ individual judgments

about the appropriate longer-run level of the real fed-

eral funds rate in the absence of further shocks to the

economy.

Participants also described their views regarding the

appropriate path of the Federal Reserve’s balance

sheet. Conditional on their respective economic out-

looks, almost all participants judged that it would be

appropriate to continue to reduce the pace of the

Committee’s purchases of longer-term securities in

measured steps and to conclude purchases in the sec-

ond half of this year. Two participants projected a

more rapid reduction in the pace of purchases and an

earlier end to the asset purchase program.

Participants’ views of the appropriate path for mon-

etary policy were informed by their judgments about

the state of the economy, including the values of the

unemployment rate and other labor market indica-

tors that would be consistent with maximum employ-

ment, the extent to which the economy was currently

falling short of maximum employment, the prospects

for inflation to reach the Committee’s longer-term

objective of 2 percent, and the balance of risks

around the outlook. A couple of participants also

mentioned using various monetary policy rules to

guide their thinking on the appropriate path for the

federal funds rate.

Uncertainty and Risks

Nearly all participants continued to judge the levels

of uncertainty about their projections for real GDP

growth and the unemployment rate as broadly simi-

lar to the norm during the previous 20 years (

fig-

ure 4

As in December, most participants continued

to judge the risks to real GDP growth and the unem-

ployment rate to be broadly balanced. Two partici-

Table 2 provides estimates of the forecast uncertainty for the

change in real GDP, the unemployment rate, and total con-

sumer price inflation over the period from 1994 through 2013.

At the end of this summary, the box “

Forecast Uncertainty”

discusses the sources and interpretation of uncertainty in the

economic forecasts and explains the approach used to assess the

uncertainty and risks attending the participants’ projections.

Table 2. Average historical projection error ranges

Percentage points

Variable 2014 2015 2016

Change in real GDP

±1.6 ±2.1 ±2.0

Unemployment rate

±0.6 ±1.2 ±1.7

Total consumer prices

±0.9 ±1.0 ±1.1

Note: Error ranges shown are measured as plus or minus the root mean squared

error of projections for 1994 through 2013 that were released in the spring by

various private and government forecasters. As described in the box “

Forecast

Uncertainty

,” under certain assumptions, there is about a 70 percent probability

that actual outcomes for real GDP, unemployment, and consumer prices will be in

ranges implied by the average size of projection errors made in the past. For more

information, see David Reifschneider and Peter Tulip (2007), “Gauging the

Uncertainty of the Economic Outlook from Historical Forecasting Errors,” Finance

and Economics Discussion Series 2007-60 (Washington: Board of Governors of

the Federal Reserve System, November), available at

www.federalreserve.gov/

pubs/feds/2007/200760/200760abs.html

; and Board of Governors of the Federal

Reserve System, Division of Research and Statistics (2014), “Updated Historical

Forecast Errors,” memorandum, April 9,

http://www.federalreserve.gov/foia/files/

20140409-historical-forecast-errors.pdf

Definitions of variables are in the general note to table 1.

Measure is the overall consumer price index, the price measure that has been

most widely used in government and private economic forecasts. Projection

is percent change, fourth quarter of the previous year to the fourth quarter of

the year indicated.

Minutes of Federal Open Market Committee Meetings | March 169

Figure 3.E. Distribution of participants’ projections for the target federal funds rate, 2014–16 and over the longer run

2014

0.00 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13

- - - - - - - - - - - - - - - - -

0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37

March projections

December projections

2015

0.00 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13

- - - - - - - - - - - - - - - - -

0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37

2016

0.00 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13

- - - - - - - - - - - - - - - - -

0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37

Longer run

0.00 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13

- - - - - - - - - - - - - - - - -

0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37

Number of participants

Percent range

Note: The target federal funds rate is measured as the level of the target rate at the end of the calendar year or in the longer run.

170 101st Annual Report | 2014

Figure 4. Uncertainty and risks in economic projections

Uncertainty about GDP growth

Number of participants

Lower Broadly Higher

similar

March projections

December projections

Uncertainty about the unemployment rate

Lower Broadly Higher

similar

Uncertainty about PCE ination

Lower Broadly Higher

similar

Uncertainty about core PCE ination

Lower Broadly Higher

similar

Risks to GDP growth

Number of participants

Number of participants Number of participants

Weighted to Weighted toBroadly

downside balanced upside

Weighted to Weighted toBroadly

downside balanced upside

Weighted to Weighted toBroadly

downside balanced upside

Weighted to Weighted toBroadly

downside balanced upside

March projections

December projections

Risks to the unemployment rate

Risks to PCE ination

Risks to core PCE ination

Note: For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.” Definitions of variables are in the general note to table 1.

Minutes of Federal Open Market Committee Meetings | March 171

pants viewed risks to output growth as weighted to

the downside, reflecting their concerns about possible

geopolitical developments and the strength of exter-

nal demand.

Almost all participants saw the level of uncertainty

and the balance of risks around their forecasts for

overall PCE inflation and core inflation as little

changed from December. The majority of partici-

pants continued to judge the levels of uncertainty

associated with their forecasts for the two inflation

measures to be broadly similar to historical norms

and the risks to those projections to be broadly bal-

anced. Five participants, however, saw the risks to

their inflation forecasts as tilted to the downside,

reflecting, for example, the possibility that the cur-

rent low levels of inflation could prove more persis-

tent than anticipated as well as elevated global risks

to the outlook. Conversely, one participant cited

upside risks to inflation stemming from uncertainty

about the timing and efficacy of the Committee’s

withdrawal of accommodation.

172 101st Annual Report | 2014

Forecast Uncertainty

The economic projections provided by the members

of the Board of Governors and the presidents of the

Federal Reserve Banks inform discussions of mon-

etary policy among policymakers and can aid public

understanding of the basis for policy actions. Con-

siderable uncertainty attends these projections, how-

ever. The economic and statistical models and rela-

tionships used to help produce economic forecasts

are necessarily imperfect descriptions of the real

world, and the future path of the economy can be

affected by myriad unforeseen developments and

events. Thus, in setting the stance of monetary

policy, participants consider not only what appears to

be the most likely economic outcome as embodied in

their projections, but also the range of alternative

possibilities, the likelihood of their occurring, and the

potential costs to the economy should they occur.

Table 2 summarizes the average historical accuracy

of a range of forecasts, including those reported in

past Monetary Policy Reports and those prepared by

the Federal Reserve Board’s staff in advance of

meetings of the Federal Open Market Committee.

The projection error ranges shown in the table illus-

trate the considerable uncertainty associated with

economic forecasts. For example, suppose a partici-

pant projects that real gross domestic product (GDP)

and total consumer prices will rise steadily at annual

rates of, respectively, 3 percent and 2 percent. If the

uncertainty attending those projections is similar to

that experienced in the past and the risks around the

projections are broadly balanced, the numbers

reported in table 2 would imply a probability of about

70 percent that actual GDP would expand within a

range of 1.4 to 4.6 percent in the current year, 0.9 to

5.1 percent in the second year, and 1.0 to 5.0 percent

in the third year. The corresponding 70 percent confi-

dence intervals for overall inflation would be 1.1 to

2.9 percent in the current year, 1.0 to 3.0 percent in

the second year, and 0.9 to 3.1 percent in the third

year.

Because current conditions may differ from those

that prevailed, on average, over history, participants

provide judgments as to whether the uncertainty

attached to their projections of each variable is

greater than, smaller than, or broadly similar to typi-

cal levels of forecast uncertainty in the past, as

shown in table 2. Participants also provide judgments

as to whether the risks to their projections are

weighted to the upside, are weighted to the down-

side, or are broadly balanced. That is, participants

judge whether each variable is more likely to be

above or below their projections of the most likely

outcome. These judgments about the uncertainty

and the risks attending each participant’s projections

are distinct from the diversity of participants’ views

about the most likely outcomes. Forecast uncertainty

is concerned with the risks associated with a particu-

lar projection rather than with divergences across a

number of different projections.

As with real activity and inflation, the outlook for the

future path of the federal funds rate is subject to con-

siderable uncertainty. This uncertainty arises primarily

because each participant’s assessment of the appro-

priate stance of monetary policy depends importantly

on the evolution of real activity and inflation over

time. If economic conditions evolve in an unexpected

manner, then assessments of the appropriate setting

of the federal funds rate would change from that

point forward.

Minutes of Federal Open Market Committee Meetings | March 173

Meeting Held on April 29–30, 2014

A meeting of the Federal Open Market Committee

was held in the offices of the Board of Governors of

the Federal Reserve System in Washington, D.C., on

Tuesday, April 29, 2014, at 10:30 a.m. and continued

on Wednesday, April 30, 2014, at 9:00 a.m.

Present

Janet L. Yellen

Chair

William C. Dudley

Vice Chairman

Richard W. Fisher

Narayana Kocherlakota

Sandra Pianalto

Charles I. Plosser

Jerome H. Powell

Jeremy C. Stein

Daniel K. Tarullo

Charles L. Evans, Jeffrey M. Lacker,

Dennis P. Lockhart, and John C. Williams

Alternate Members of the Federal Open Market

Committee

James Bullard, Esther L. George,

and Eric Rosengren

Presidents of the Federal Reserve Banks of St. Louis,

Kansas City, and Boston, respectively

William B. English

Secretary and Economist

Matthew M. Luecke

Deputy Secretary

Michelle A. Smith

Assistant Secretary

Scott G. Alvarez

General Counsel

Steven B. Kamin

Economist

David W. Wilcox

Economist

James A. Clouse, Thomas A. Connors,

Evan F. Koenig, Thomas Laubach,

Michael P. Leahy, Loretta J. Mester,

Samuel Schulhofer-Wohl,

Mark E. Schweitzer, and William Wascher

Associate Economists

Simon Potter

Manager, System Open Market Account

Lorie K. Logan

Deputy Manager, System Open Market Account

Robert deV. Frierson

Secretary of the Board, Office of the Secretary,

Board of Governors

Michael S. Gibson

Director, Division of Banking Supervision and

Regulation, Board of Governors

Nellie Liang

Director, Office of Financial Stability Policy and

Research, Board of Governors

Matthew J. Eichner

Deputy Director, Division of Research and Statistics,

Board of Governors

Stephen A. Meyer and William Nelson

Deputy Directors, Division of Monetary Affairs,

Board of Governors

Jon W. Faust

Special Adviser to the Board, Office of Board

Members, Board of Governors

Trevor A. Reeve

Special Adviser to the Chair, Office of Board

Members, Board of Governors

Linda Robertson

Assistant to the Board, Office of Board Members,

Board of Governors

Ellen E. Meade and Joyce K. Zickler

Senior Advisers, Division of Monetary Affairs,

Board of Governors

David Bowman

and Beth Anne Wilson

Associate Directors, Division of International

Finance, Board of Governors

Attended Wednesday’s session only.

Attended the discussion of monetary policy normalization.

Attended Tuesday’s session only.

Attended Tuesday’s session following the discussion of mon-

etary policy normalization.

174 101st Annual Report | 2014

Daniel M. Covitz, David E. Lebow,

and Michael G. Palumbo

Associate Directors, Division of Research and

Statistics, Board of Governors

Fabio M. Natalucci

and Gretchen C. Weinbach

Associate Directors, Division of Monetary Affairs,

Board of Governors

Marnie Gillis DeBoer

and Jane E. Ihrig

Deputy Associate Directors, Division of Monetary

Affairs, Board of Governors

Brian J. Gross

Special Assistant to the Board, Office of Board

Members, Board of Governors

Stacey Tevlin

Assistant Director, Division of Research and

Statistics, Board of Governors

Robert J. Tetlow

Adviser, Division of Monetary Affairs,

Board of Governors

Dana L. Burnett

Section Chief, Division of Monetary Affairs,

Board of Governors

Patrick McCabe

Senior Economist, Division of Research and

Statistics, Board of Governors

Penelope A. Beattie

Assistant to the Secretary, Office of the Secretary,

Board of Governors

Randall A. Williams

Records Project Manager, Division of Monetary

Affairs, Board of Governors

James M. Lyon

First Vice President, Federal Reserve Bank of

Minneapolis

David Altig, James J. McAndrews,

and Alberto G. Musalem

Executive Vice Presidents, Federal Reserve Banks of

Atlanta, New York, and New York, respectively

Joshua L. Frost and Spencer Krane

Senior Vice Presidents, Federal Reserve Banks of

New York and Chicago, respectively

George A. Kahn, Antoine Martin, Joe Peek,

Keith Sill, Daniel L. Thornton, and Douglas Tillett

Vice Presidents, Federal Reserve Banks of

Kansas City, New York, Boston, Philadelphia,

St. Louis, and Chicago, respectively

Andreas L. Hornstein

Senior Advisor, Federal Reserve Bank of Richmond

John Fernald

Senior Research Adviser, Federal Reserve Bank of

San Francisco

Sean Savage

Senior Associate, Federal Reserve Bank of New York

Monetary Policy Normalization

In a joint session of the Federal Open Market Com-

mittee (FOMC) and the Board of Governors of the

Federal Reserve System, meeting participants dis-

cussed issues associated with the eventual normaliza-

tion of the stance and conduct of monetary policy.

The Committee’s discussion of this topic was under-

taken as part of prudent planning and did not imply

that normalization would necessarily begin sometime

soon. A staff presentation outlined several

approaches to raising short-term interest rates when

it becomes appropriate to do so, and to controlling

the level of short-term interest rates once they are

above the effective lower bound, during a period

when the Federal Reserve will have a very large bal-

ance sheet. The approaches differed in terms of the

combination of policy tools that might be used to

accomplish those objectives. In addition to the rate of

interest paid on excess reserve balances, the tools

considered included fixed-rate overnight reverse

repurchase (ON RRP) operations, term reverse

repurchase agreements, and the Term Deposit Facil-

ity (TDF). The staff presentation discussed the

potential implications of each approach for financial

intermediation and financial markets, including the

federal funds market, and the possible implications

for financial stability. In addition, the staff outlined

options for additional operational testing of the

policy tools.

Following the staff presentation, meeting partici-

pants discussed a wide range of topics related to

policy normalization. Participants generally agreed

that starting to consider the options for normaliza-

tion at this meeting was prudent, as it would help the

Committee to make decisions about approaches to

policy normalization and to communicate its plans to

the public well before the first steps in normalizing

policy become appropriate. Early communication, in

turn, would enhance the clarity and credibility of

monetary policy and help promote the achievement

of the Committee’s statutory objectives. It was

emphasized that the tools available to the Committee

Minutes of Federal Open Market Committee Meetings | April 175

will allow it to reduce policy accommodation when

doing so becomes appropriate. Participants consid-

ered how various combinations of tools could have

different implications for the degree of control over

short-term interest rates, for the Federal Reserve’s

balance sheet and remittances to the Treasury, for the

functioning of the federal funds market, and for

financial stability in both normal times and in peri-

ods of stress. Because the Federal Reserve has not

previously tightened the stance of policy while hold-

ing a large balance sheet, most participants judged

that the Committee should consider a range of

options and be prepared to adjust the mix of its

policy tools as warranted. Participants generally

favored the further testing of various tools, including

the TDF, to better assess their operational readiness

and effectiveness. No decisions regarding policy nor-

malization were taken; participants requested addi-

tional analysis from the staff and agreed that it would

be helpful to continue to review these issues at

upcoming meetings. The Board meeting concluded at

the end of the discussion.

Developments in Financial Markets and

the Federal Reserve’s Balance Sheet

The manager of the System Open Market Account

(SOMA) reported on developments in domestic and

foreign financial markets as well as the System open

market operations during the period since the Com-

mittee met on March 18–19, 2014. By unanimous

vote, the Committee ratified the Open Market Desk’s

domestic transactions over the intermeeting period.

There were no intervention operations in foreign cur-

rencies for the System’s account over the intermeet-

ing period.

By unanimous vote, the Committee agreed to renew

the reciprocal currency arrangements with the Bank

of Canada and the Bank of Mexico; these arrange-

ments are associated with the Federal Reserve’s par-

ticipation in the North American Framework Agree-

ment of 1994. In addition, by unanimous vote, the

Committee agreed to renew the dollar and foreign

currency liquidity swap arrangements with the Bank

of Canada, the Bank of England, the Bank of Japan,

the European Central Bank, and the Swiss National

Bank. The votes to renew the Federal Reserve’s par-

ticipation in these arrangements were taken at this

meeting because provisions in the arrangements

specify that the Federal Reserve provide six months’

prior notice of an intention to terminate its

participation.

Staff Review of the Economic Situation

The information reviewed for the April 29–30 meet-

ing indicated that growth in economic activity paused

in the first quarter as a whole, but that activity

stepped up late in the quarter; this pattern reflected,

in part, the temporary effects of the unusually cold

and snowy weather earlier in the quarter and the

unwinding of those effects later in the quarter. In

March, payroll employment increased further,

although the unemployment rate held steady and was

still elevated. Consumer price inflation continued to

run below the Committee’s longer-run objective, but

measures of longer-run inflation expectations

remained stable.

The unemployment rate stayed at 6.7 percent in

March, but both the labor force participation rate

and the employment-to-population ratio increased

slightly. The rate of long-duration unemployment

declined somewhat, but the share of workers

employed part time for economic reasons moved up;

both of these measures were still well above their pre-

recession levels. Initial claims for unemployment

insurance remained low over the intermeeting period.

Although the rate of job openings moved up in Feb-

ruary, the hiring rate was flat and continued to be

subdued.

Following a rebound in February that was partly

weather related, manufacturing production rose fur-

ther in March and the rate of manufacturing capac-

ity utilization increased. The production of motor

vehicles and parts declined in March, but factory

output outside of the motor vehicle sector expanded.

Automakers’ schedules indicated that the pace of

motor vehicle assemblies in the coming months

would be similar to the level in March. However,

broad indicators of manufacturing production, such

as the new orders indexes from the national and

regional manufacturing surveys, were at levels consis-

tent with moderate increases in factory output in the

near term.

Real personal consumption expenditures (PCE)

expanded slightly less rapidly in the first quarter than

in the fourth quarter. After moving roughly sideways,

on net, in January and February, the component of

nominal retail sales used by the Bureau of Economic

Analysis (BEA) to construct its monthly estimate of

PCE rose briskly in March, in part because the

weather returned to more seasonal norms. Recent

information on several important factors that influ-

ence household spending was positive. Real dispos-

176 101st Annual Report | 2014

able income continued to increase in the f irst quarter,

further gains in house prices likely bolstered house-

hold net worth, and consumer sentiment in the

Thomson Reuters/University of Michigan Surveys of

Consumers improved, on balance, in March and

April.

The pace of activity in the housing sector remained

soft, as real expenditures for residential investment

decreased again in the f irst quarter. Starts of new

single-family homes increased in March. However,

permits for single-family homes—which are typically

less sensitive to fluctuations in the weather and a bet-

ter indicator of the underlying pace of construc-

tion—remained below their fourth-quarter level and

had not shown a sustained improvement since last

spring, when mortgage rates began to rise. Sales of

both new and existing homes decreased in March of

this year, but pending home sales rose.

Real private expenditures on business equipment and

intellectual property products declined in the first

quarter. However, nominal shipments of nondefense

capital goods excluding aircraft rose in February and

in March, and new orders were somewhat above the

level of shipments, pointing to modest gains in ship-

ments in the near term. Other forward-looking indi-

cators, such as surveys of business conditions and

capital spending plans, were also consistent with

increased outlays for business equipment in the com-

ing months. Real spending for nonresidential con-

struction was about flat in the first quarter after

declining in the fourth quarter, while real inventory

investment moved lower. Business inventories in most

industries appeared to be broadly aligned with sales

in recent months.

Real federal government purchases rose slightly in the

first quarter, as the increase from the reversal of the

government shutdown in the fourth quarter was

mostly offset by the ongoing downtrend in purchases.

Real state and local government purchases decreased

somewhat in the first quarter, as state and local con-

struction expenditures declined.

The U.S. international trade deficit widened in Feb-

ruary as exports fell and imports rose. The export

declines were concentrated in aircraft and petroleum

products, while exports of consumer goods rose. Ris-

ing imports of services and automotive products off-

set declines in imports of oil and capital goods. In the

advance release of the national income and product

accounts, the BEA estimated that net exports sub-

tracted substantially from real gross domestic prod-

uct (GDP) growth in the first quarter.

U.S. consumer prices, as measured by the PCE price

index, rose at a slow rate in the first quarter, though

somewhat faster than the pace posted in the fourth

quarter, and were about 1 percent higher than a year

earlier. After falling in the fourth quarter, consumer

energy prices increased markedly in the first quarter

as natural gas prices moved higher on a sharp decline

in inventories during the unusually cold winter

months. The PCE price index for items excluding

food and energy rose at the same rate in the first

quarter as in the previous one and was around

1¼ percent higher than four quarters earlier. Both

near- and longer-term inflation expectations from the

Michigan survey were unchanged in March and

April. Over the 12 months ending in March, both the

employment cost index for private-sector workers

and average hourly earnings for all employees

increased only a little more than consumer price

inflation.

Indicators of foreign economic activity suggested

continued expansion in the f irst quarter but at a rate

somewhat below that in the fourth quarter. The

deceleration was concentrated in emerging market

economies (EMEs). Real GDP growth slowed mark-

edly in China, largely reflecting lower investment

growth and exports. Weaker exports also restrained

economic activity in other emerging Asian econo-

mies. In Mexico, indicators of activity suggested

some improvement from a lackluster fourth quarter.

By contrast, economic growth remained near its solid

fourth-quarter pace in the advanced foreign econo-

mies (AFEs). In the euro area, the United Kingdom,

and Canada, average industrial production in the

first two months of the year was up moderately from

the fourth quarter; in Japan, industrial production

rose robustly, and consumer demand was boosted by

anticipation of the April increase in the consumption

tax. Inflation developments were mixed. Inflation

rebounded in Canada but remained very low in the

euro area. In China and India, inflation fell in the

first quarter, largely because of lower food prices.

Monetary policy remained highly accommodative

during the intermeeting period in the AFEs and also

in many EMEs, although monetary policy in Brazil

was tightened to contain inflation pressures.

Minutes of Federal Open Market Committee Meetings | April 177

Staff Review of the Financial Situation

Despite some volatility in certain asset prices, finan-

cial conditions did not change appreciably, on net,

over the intermeeting period. Asset prices moved in

response to economic data releases that were, on bal-

ance, a little stronger than expected and to Federal

Reserve communications. The anticipated path of the

federal funds rate moved up somewhat, as did

intermediate-dated Treasury yields, while corporate

bond spreads narrowed and the S&P 500 increased

slightly. The foreign exchange value of the dollar was

little changed.

Federal Reserve communications garnered significant

attention from market participants over the period

but appeared to have only a modest net effect on

their expectations for monetary policy. The commu-

nications following the conclusion of the March

FOMC meeting were interpreted as somewhat less

accommodative than expected. However, subsequent

communications—including the release of the min-

utes of the March FOMC meeting—appeared to

mostly reverse the earlier change in expectations.

Yields on short- and medium-term nominal Treasury

securities rose, on balance, over the intermeeting

period. In contrast, yields at the long end of the

curve declined, continuing a downward trend evident

over much of this year. Market participants cited a

number of factors as contributing to the drop in

long-term yields so far this year, including portfolio

reallocation by large institutional investors, the trad-

ing strategies pursued by some investors, and safe-

haven flows. Some market participants reportedly

also revised down their estimate of the average real

federal funds rate over the longer term, reflecting in

part changes in their assessments of long-run eco-

nomic conditions. Measures of longer-horizon infla-

tion compensation based on Treasury Inflation-

Protected Securities were little changed.

Conditions in short-term funding markets remained

fairly stable over the intermeeting period. Take-up in

the Federal Reserve’s f ixed-rate ON RRP exercise

continued to be sensitive to the spread between mar-

ket rates and the rate offered in the exercise, with

higher take-up occurring on days when the market

rate on repurchase agreements was close to or below

the ON RRP rate. As has been the case since the ON

RRP exercise began, money market funds increased

their usage at quarter-end; take-up reached a record

level of about $240 billion at the end of March. Part

of the increase in ON RRP usage at the end of

March relative to the end of December likely

reflected higher counterparty allotment limits, which

were raised from $3 billion to $7 billion during the

first quarter. The allotment limit was subsequently

increased to $10 billion per counterparty in early

April. The seasonal paydown of short-term Treasury

debt following the April tax date was accompanied

by a notable pickup in participation at ON RRP

operations, but Treasury repo rates generally

remained very close to the ON RRP rate of 5 basis

points.

The S&P 500 increased a bit, on net, over the inter-

meeting period, but broader stock market indexes

edged down. The prices of social media and biotech-

nology stocks, which had risen substantially faster

than the broader market over the previous year, fell

sharply over the intermeeting period, leaving the

gains on these shares about in line with those on

broader indexes over the past 12 months. Some initial

public offerings were reportedly put on hold as prices

of small-capitalization stocks declined. By contrast,

stocks that generally have more stable dividends, such

as those of utility and telecommunications compa-

nies, advanced. First-quarter earnings reports for

large banking organizations were mixed, and the

stock prices of such firms generally underperformed

broad equity indexes.

Credit flows to nonfinancial corporations remained

robust, on balance, notwithstanding subdued bond

issuance in April that was attributed to typical con-

straints on issuance during the period when many

firms are reporting their earnings. The growth in

commercial and industrial loans on banks’ balance

sheets remained robust, consistent with the increase

in loan demand by large and middle-market firms

reported in the April Senior Loan Officer Opinion

Survey on Bank Lending Practices (SLOOS). Institu-

tional issuance of leveraged loans continued at a

brisk pace amid reports of an ongoing gradual easing

of credit terms and deal structures.

Financing conditions in the commercial real estate

(CRE) sector improved further. In the first quarter,

commercial mortgage loans held on banks’ books

continued to grow solidly. According to the April

SLOOS, banks again eased standards on CRE loans

during the first quarter; they also reported an

increase in loan demand, especially for construction

178 101st Annual Report | 2014

and land development loans. In contrast, issuance of

commercial mortgage-backed securities in 2014 has

been a bit slower than last year’s pace.

Mortgage credit conditions generally remained tight

over the intermeeting period, though signs of easing

continued to emerge amid further gains in house

prices. In particular, the April SLOOS indicated a net

easing of banks’ credit standards for home-purchase

loans to prime customers in the first quarter. Mort-

gage interest rates and their spreads over Treasury

yields were little changed over the intermeeting

period, and applications for refinancing and pur-

chase mortgages remained tepid.

Conditions in consumer credit markets continued to

be mixed. Student and auto loans expanded at a

robust pace, while credit card debt outstanding

stayed flat, as it had been in recent months. Financ-

ing conditions in the consumer asset-backed securi-

ties market remained favorable, and issuance contin-

ued to be solid.

Most foreign equity indexes rose over the period

despite a global selloff of technology-related stocks,

and 10-year sovereign bond yields in Canada, Ger-

many, and the United Kingdom were nearly

unchanged on net. Yield spreads on peripheral euro-

area debt over German bonds of similar maturity

continued to narrow. The broad nominal exchange

rate index for the dollar was about unchanged, as the

dollar appreciated against the euro, yen, and ren-

minbi but depreciated against most other currencies.

Investor sentiment toward EMEs continued to

improve over the period despite incoming data that

were somewhat weaker than expected. Increasing ten-

sions between Ukraine and Russia, as well as the low-

ering of Russia’s sovereign debt rating by Standard &

Poor’s, contributed to a rise in Russia’s 10-year sov-

ereign bond yield and a sharp decline in its main

equity index. Outside of that region, however, these

building tensions left little imprint on global financial

markets.

The staff’s periodic report on potential risks to finan-

cial stability concluded that the vulnerability of the

financial system to adverse shocks remained at mod-

erate levels overall. Relatively strong capital profiles

of large domestic banking firms, low levels of aggre-

gate leverage in the nonf inancial sector, and moder-

ate use of short-term wholesale funding across the

financial sector were seen as the primary factors sup-

porting overall financial stability. However, the staff

report also highlighted valuation pressures in some

segments of the equity market, continued strong

demand for corporate debt instruments and associ-

ated pressures on underwriting standards, and liquid-

ity risks associated with fixed-income mutual funds.

Staff Economic Outlook

In the economic forecast prepared by the staff for the

April FOMC meeting, real GDP growth in the first

half of this year was somewhat slower than in the

projection for the March meeting. The available read-

ings on net exports and, to a lesser extent, residential

investment pointed to less spending growth in the

first quarter than the staff previously expected. How-

ever, the staff’s assessment was that the unanticipated

weakness in economic activity in the first quarter

would be largely transitory and implied little revision

to its projection for second-quarter output growth. In

addition, the medium-term forecast for real GDP

growth was essentially unrevised. The staff continued

to project that real GDP would expand at a faster

pace over the next few years than it did last year, and

that it would rise more quickly than the growth rate

of potential output. The faster pace of real GDP

growth was expected to be supported by an easing in

the restraint from changes in fiscal policy, increases

in consumer and business confidence, further

improvements in credit availability and financial con-

ditions, and a pickup in the rate of foreign economic

growth. The expansion in economic activity was

anticipated to slowly reduce resource slack over the

projection period, and the unemployment rate was

expected to decline gradually to the staff’s estimate

of its longer-run natural rate.

The staff’s forecast for inflation was basically

unchanged from the projection prepared for the pre-

vious FOMC meeting. The staff continued to fore-

cast that inflation would remain below the Commit-

tee’s longer-run objective of 2 percent over the next

few years. With longer-run inflation expectations

assumed to remain stable, changes in commodity and

import prices expected to be subdued, and slack in

labor and product markets anticipated to diminish

slowly, inflation was projected to rise gradually

toward the Committee’s objective.

The staff viewed the extent of uncertainty around its

April projections for real GDP growth, inflation, and

the unemployment rate as roughly in line with the

average over the past 20 years. Nonetheless, the risks

to the forecast for real GDP growth were viewed as

tilted a little to the downside, especially because the

economy was not well positioned to withstand

Minutes of Federal Open Market Committee Meetings | April 179

adverse shocks while the target for the federal funds

rate was at its effective lower bound. At the same

time, the staff viewed the risks around its outlook for

the unemployment rate and for inflation as roughly

balanced.

Participants’ Views on Current Conditions

and the Economic Outlook

In their discussion of the economic situation and the

outlook, meeting participants generally indicated

that their assessment of the economic outlook had

not changed materially since the March meeting.

Severe winter weather had contributed to a sharp

slowing in activity during the first quarter, but recent

indicators pointed to a rebound and suggested that

the economy had returned to a trajectory of moder-

ate growth. However, some participants remarked

that it was too early to confirm that the bounceback

in economic activity would put the economy on a

path of sustained above-trend economic growth. In

general, participants continued to view the risks to

the outlook for the economy and the labor market as

nearly balanced. However, a number of participants

pointed to possible sources of downside risk to

growth, including a persistent slowdown in the hous-

ing sector or potential international developments,

such as a further slowing of growth in China or an

increase in geopolitical tensions regarding Russia and

Ukraine.

Participants noted that business contacts in many

parts of the country were generally optimistic about

economic prospects, with reports of increased sales

of automobiles, higher production in the aerospace

industry, and increased usage of industrial power; in

addition, a couple of fir ms with a global presence

reported a notable increase in demand from custom-

ers in Europe. Contacts in several Districts pointed to

plans for increasing capital expenditures or to

stronger demand for commercial and industrial loans.

In the agricultural sector, the planting season was

under way, but there were concerns about the effects

of drought on production in some areas.

Most participants commented on the continuing

weakness in housing activity. They saw a range of

factors affecting the housing market, including

higher home prices, construction bottlenecks stem-

ming from a scarcity of labor and harsh winter

weather, input cost pressures, or a shortage in the

supply of available lots. Views varied regarding the

outlook for the multifamily sector, with the large

increase in multifamily units coming to market

potentially putting downward pressure on prices and

rents, but the demand for this type of housing

expected to rise as the population ages. A couple of

participants noted that mortgage credit availability

remained constrained and lending standards were

tight compared with historical norms, especially for

purchase mortgages. However, reports from some

Districts indicated that real estate and housing-

related business activity had strengthened recently,

consistent with the solid gains in consumer spending

registered in March.

Conditions in the labor market continued to improve

over the intermeeting period and participants gener-

ally expected further gradual improvement. Partici-

pants discussed a range of research and analysis

bearing on the amount of available slack remaining

in the labor market. A number of them argued that

several indicators of labor underutilization—includ-

ing the low labor force participation rate and the still-

elevated rates of longer-duration unemployment and

of workers employed part time for economic rea-

sons—suggested that there is more slack in the labor

market than is captured by the unemployment rate

alone. Low nominal wage inflation was also viewed as

consistent with slack in labor markets. However,

some participants reported that labor markets were

tight in their Districts or that contacts indicated some

sectors or occupations were experiencing shortages of

workers. Another participant observed that labor

underutilization, as measured by an index that takes

employment transition rates into account, was con-

sistent with past periods in which the official unem-

ployment rate had reached its current level, and had

declined about as much relative to the official unem-

ployment rate as it had in previous economic

recoveries.

In discussing the effect of labor market conditions on

inflation, a number of participants expressed skepti-

cism about recent studies suggesting that long-term

unemployment provides less downward pressure on

wage and price inflation than short-term unemploy-

ment does. A couple of participants cited other

research findings that both short- and long-term

unemployment rates exert pressure on wages, with

the effects of long-term unemployment increasing as

the level of short-term unemployment declines.

Moreover, a few participants pointed out that

because of downward nominal wage rigidity during

the recession, wage increases are likely to remain rela-

tively modest for some time during the recovery, even

as the labor market strengthens. It was also noted

that because inflation was expected to remain well

180 101st Annual Report | 2014

below the Committee’s 2 percent objective and the

unemployment rate was still above participants’ esti-

mates of its longer-run normal level, the Committee

did not, at present, face a tradeoff between its

employment and inflation objectives, and an expan-

sion of aggregate demand would result in further

progress relative to both objectives.

Inflation continued to run below the Committee’s

2 percent longer-run objective over the intermeeting

period. Many participants saw the recent behavior of

the prices of food, energy, shelter, and imports as

consistent with a stabilization in inflation and judged

that the transitory factors that had reduced inflation,

such as declines in administered prices for medical

services, were fading. Most participants expected

inflation to return to 2 percent within the next few

years, supported by highly accommodative monetary

policy, stable inflation expectations, and a continued

gradual recovery in economic activity. However, a few

others expressed the concern that the return to 2 per-

cent inflation could be even more gradual.

In their discussion of financial stability, participants

generally did not see imbalances that posed signifi-

cant near-term risks to the financial system and the

broader economy, but they nevertheless reviewed

some financial developments that pointed to poten-

tial future risks. A couple of participants noted that

conditions in the leveraged loan market had become

stretched, although equity cushions on new deals

remained above levels seen prior to the financial cri-

sis. Two others saw declining credit spreads, particu-

larly on speculative-grade corporate bonds, as consis-

tent with an increase in investors’ appetite for risk. In

addition, several participants noted that the low level

of expected volatility implied by some financial mar-

ket prices might also signal an increase in risk appe-

tite. Some stated that it would be helpful to continue

to explore the appropriate regulatory, supervisory,

and monetary policy responses to potential risks to

financial stability.

It was noted that the changes to the Committee’s for-

ward guidance at the March FOMC meeting had

been well understood by investors. However, a num-

ber of participants emphasized the importance of

communicating still more clearly about the Commit-

tee’s policy intentions as the time of the first increase

in the federal funds rate moves closer. Some thought

it would be helpful to clarify the reasoning underly-

ing the language in the FOMC’s postmeeting state-

ment indicating that even after employment and

inflation are near mandate-consistent levels, eco-

nomic conditions may, for some time, warrant keep-

ing the target federal funds rate below levels the

Committee views as normal in the longer run. In

addition, a few participants judged that additional

clarity about the Committee’s reaction function

could be particularly important in the event that

future economic conditions necessitate a more rapid

rise in the target federal funds rate than the Commit-

tee currently anticipates. A number of participants

suggested that it would be useful to provide addi-

tional information regarding how long the Commit-

tee would continue its policy of rolling over maturing

Treasury securities at auction and reinvesting princi-

pal payments on all agency debt and agency

mortgage-backed securities in agency mortgage-

backed securities.

Committee Policy Action

Members viewed the information received over the

intermeeting period as indicating that economic

growth had picked up recently, following a sharp

slowdown during the winter due in part to unusually

severe weather conditions. Although labor market

indicators were mixed, on balance they showed fur-

ther improvement. The unemployment rate, however,

remained elevated. While household spending

appeared to be rising more rapidly, business fixed

investment had edged down and the recovery in the

housing sector remained slow. Fiscal policy was

restraining economic growth, but the extent of that

restraint had diminished. The Committee expected

that, with appropriate policy accommodation, eco-

nomic activity would expand at a moderate pace and

labor market conditions would continue to improve

gradually, moving toward those the Committee

judges to be consistent with its dual mandate. More-

over, members continued to see risks to the outlook

for the economy and the labor market as nearly bal-

anced. Inflation was running below the Committee’s

longer-run objective and was seen as posing possible

risks to economic performance, but members antici-

pated that stable inflation expectations and strength-

ening economic activity would, over time, return

inflation to the Committee’s 2 percent target. How-

ever, in light of their concerns about the possible per-

sistence of low inflation, members agreed that infla-

tion developments should be monitored carefully for

evidence that inflation was moving back toward the

Committee’s longer-run objective.

In their discussion of monetary policy in the period

ahead, members noted that there had been little

change in the economic outlook since the March

Minutes of Federal Open Market Committee Meetings | April 181

meeting and decided that it would be appropriate to

make a further measured reduction in the pace of

asset purchases at this meeting. Accordingly, the

Committee agreed that, beginning in May, it would

add to its holdings of agency mortgage-backed secu-

rities at a pace of $20 billion per month rather than

$25 billion per month, and would add to its holdings

of longer-term Treasury securities at a pace of

$25 billion per month rather than $30 billion per

month. Members again judged that, if the economy

continued to develop as anticipated, the Committee

would likely reduce the pace of asset purchases in

further measured steps at future meetings. However,

members underscored that the pace of asset pur-

chases was not on a preset course and would remain

contingent on the Committee’s outlook for the labor

market and inflation as well as its assessment of the

likely efficacy and costs of purchases.

The Committee agreed that no changes to its target

range for the federal funds rate or its forward guid-

ance were warranted at this meeting, aside from

removing a short paragraph that was added when the

forward guidance was updated at the March meeting

and which noted that the change in the Committee’s

guidance did not signal a change in the Committee’s

policy intentions; members deemed this language no

longer necessary.

At the conclusion of the discussion, the Committee

voted to authorize and direct the Federal Reserve

Bank of New York, until it was instructed otherwise,

to execute transactions in the SOMA in accordance

with the following domestic policy directive:

“Consistent with its statutory mandate, the Fed-

eral Open Market Committee seeks monetary

and financial conditions that will foster maxi-

mum employment and price stability. In particu-

lar, the Committee seeks conditions in reserve

markets consistent with federal funds trading in

a range from 0 to ¼ percent. The Committee

directs the Desk to undertake open market

operations as necessary to maintain such condi-

tions. Beginning in May, the Desk is directed to

purchase longer-term Treasury securities at a

pace of about $25 billion per month and to pur-

chase agency mortgage-backed securities at a

pace of about $20 billion per month. The Com-

mittee also directs the Desk to engage in dollar

roll and coupon swap transactions as necessary

to facilitate settlement of the Federal Reserve’s

agency mortgage-backed securities transactions.

The Committee directs the Desk to maintain its

policy of rolling over maturing Treasury securi-

ties into new issues and its policy of reinvesting

principal payments on all agency debt and

agency mortgage-backed securities in agency

mortgage-backed securities. The System Open

Market Account Manager and the Secretary will

keep the Committee informed of ongoing devel-

opments regarding the System’s balance sheet

that could affect the attainment over time of the

Committee’s objectives of maximum employ-

ment and price stability.”

The vote encompassed approval of the statement

below to be released at 2:00 p.m.:

“Information received since the Federal Open

Market Committee met in March indicates that

growth in economic activity has picked up

recently, after having slowed sharply during the

winter in part because of adverse weather condi-

tions. Labor market indicators were mixed but

on balance showed further improvement. The

unemployment rate, however, remains elevated.

Household spending appears to be rising more

quickly. Business fixed investment edged down,

while the recovery in the housing sector

remained slow. Fiscal policy is restraining eco-

nomic growth, although the extent of restraint is

diminishing. Inflation has been running below

the Committee’s longer-run objective, but

longer-term inflation expectations have

remained stable.

Consistent with its statutory mandate, the Com-

mittee seeks to foster maximum employment

and price stability. The Committee expects that,

with appropriate policy accommodation, eco-

nomic activity will expand at a moderate pace

and labor market conditions will continue to

improve gradually, moving toward those the

Committee judges consistent with its dual man-

date. The Committee sees the risks to the out-

look for the economy and the labor market as

nearly balanced. The Committee recognizes that

inflation persistently below its 2 percent objec-

tive could pose risks to economic performance,

and it is monitoring inflation developments care-

fully for evidence that inflation will move back

toward its objective over the medium term.

The Committee currently judges that there is

sufficient underlying strength in the broader

economy to support ongoing improvement in

labor market conditions. In light of the cumula-

182 101st Annual Report | 2014

tive progress toward maximum employment and

the improvement in the outlook for labor market

conditions since the inception of the current

asset purchase program, the Committee decided

to make a further measured reduction in the

pace of its asset purchases. Beginning in May,

the Committee will add to its holdings of agency

mortgage-backed securities at a pace of $20 bil-

lion per month rather than $25 billion per

month, and will add to its holdings of longer-

term Treasury securities at a pace of $25 billion

per month rather than $30 billion per month.

The Committee is maintaining its existing policy

of reinvesting principal payments from its hold-

ings of agency debt and agency mortgage-

backed securities in agency mortgage-backed

securities and of rolling over maturing Treasury

securities at auction. The Committee’s sizable

and still-increasing holdings of longer-term

securities should maintain downward pressure

on longer-term interest rates, support mortgage

markets, and help to make broader financial

conditions more accommodative, which in turn

should promote a stronger economic recovery

and help to ensure that inflation, over time, is at

the rate most consistent with the Committee’s

dual mandate.

The Committee will closely monitor incoming

information on economic and financial develop-

ments in coming months and will continue its

purchases of Treasury and agency mortgage-

backed securities, and employ its other policy

tools as appropriate, until the outlook for the

labor market has improved substantially in a

context of price stability. If incoming informa-

tion broadly supports the Committee’s expecta-

tion of ongoing improvement in labor market

conditions and inflation moving back toward its

longer-run objective, the Committee will likely

reduce the pace of asset purchases in further

measured steps at future meetings. However,

asset purchases are not on a preset course, and

the Committee’s decisions about their pace will

remain contingent on the Committee’s outlook

for the labor market and inflation as well as its

assessment of the likely efficacy and costs of

such purchases.

To support continued progress toward maxi-

mum employment and price stability, the Com-

mittee today reaffirmed its view that a highly

accommodative stance of monetary policy

remains appropriate. In determining how long to

maintain the current 0 to ¼ percent target range

for the federal funds rate, the Committee will

assess progress—both realized and expected—

toward its objectives of maximum employment

and 2 percent inflation. This assessment will take

into account a wide range of information,

including measures of labor market conditions,

indicators of inflation pressures and inflation

expectations, and readings on financial develop-

ments. The Committee continues to anticipate,

based on its assessment of these factors, that it

likely will be appropriate to maintain the current

target range for the federal funds rate for a con-

siderable time after the asset purchase program

ends, especially if projected inflation continues

to run below the Committee’s 2 percent longer-

run goal, and provided that longer-term infla-

tion expectations remain well anchored.

When the Committee decides to begin to remove

policy accommodation, it will take a balanced

approach consistent with its longer-run goals of

maximum employment and inflation of 2 per-

cent. The Committee currently anticipates that,

even after employment and inflation are near

mandate-consistent levels, economic conditions

may, for some time, warrant keeping the target

federal funds rate below levels the Committee

views as normal in the longer run.”

Voting for this action: Janet L. Yellen, William C.

Dudley, Richard W. Fisher, Narayana Kocherlakota,

Sandra Pianalto, Charles I. Plosser, Jerome H.

Powell, Jeremy C. Stein, and Daniel K. Tarullo.

Voting against this action: None.

It was agreed that the next meeting of the Committee

would be held on Tuesday–Wednesday, June 17–18,

2014. The meeting adjourned at 10:55 a.m. on

April 30, 2014.

Notation Vote

By notation vote completed on April 8, 2014, the

Committee unanimously approved the minutes of the

Committee meeting held on March 18–19, 2014.

William B. English

Secretary

Minutes of Federal Open Market Committee Meetings | April 183

Meeting Held on June 17–18, 2014

A meeting of the Federal Open Market Committee

was held in the offices of the Board of Governors of

the Federal Reserve System in Washington, D.C., on

Tuesday, June 17, 2014, at 10:00 a.m. and continued

on Wednesday, June 18, 2014, at 9:00 a.m.

Present

Janet L. Yellen

Chair

William C. Dudley

Vice Chairman

Lael Brainard

Stanley Fischer

Richard W. Fisher

Narayana Kocherlakota

Loretta J. Mester

Charles I. Plosser

Jerome H. Powell

Daniel K. Tarullo

Christine Cumming, Charles L. Evans,

Jeffrey M. Lacker, Dennis P. Lockhart,

and John C. Williams

Alternate Members of the Federal Open Market

Committee

James Bullard, Esther L. George,

and Eric Rosengren

Presidents of the Federal Reserve Banks of St. Louis,

Kansas City, and Boston, respectively

William B. English

Secretary and Economist

Matthew M. Luecke

Deputy Secretary

Michelle A. Smith

Assistant Secretary

Scott G. Alvarez

General Counsel

Steven B. Kamin

Economist

David W. Wilcox

Economist

James A. Clouse, Thomas A. Connors,

Evan F. Koenig, Thomas Laubach,

Michael P. Leahy, Samuel Schulhofer-Wohl,

Mark E. Schweitzer, and William Wascher

Associate Economists

Simon Potter

Manager, System Open Market Account

Lorie K. Logan

Deputy Manager, System Open Market Account

Robert deV. Frierson

Secretary of the Board, Office of the Secretary,

Board of Governors

Nellie Liang

Director, Office of Financial Stability Policy and

Research, Board of Governors

Stephen A. Meyer and William R. Nelson

Deputy Directors, Division of Monetary Affairs,

Board of Governors

Mark E. Van Der Weide

Deputy Director, Division of Banking Supervision

and Regulation, Board of Governors

Jon W. Faust and Stacey Tevlin

Special Advisers to the Board, Office of Board

Members, Board of Governors

Trevor A. Reeve

Special Adviser to the Chair, Office of Board

Members, Board of Governors

Linda Robertson

Assistant to the Board, Office of Board Members,

Board of Governors

Brian M. Doyle

Senior Adviser, Division of International Finance,

Board of Governors

Ellen E. Meade and Joyce K. Zickler

Senior Advisers, Division of Monetary Affairs,

Board of Governors

Daniel M. Covitz, Eric M. Engen,

Michael T. Kiley, and David E. Lebow

Associate Directors, Division of Research and

Statistics, Board of Governors

Fabio M. Natalucci

and Gretchen C. Weinbach

Associate Directors, Division of Monetary Affairs,

Board of Governors

Attended the joint session of the Federal Open Market Com-

mittee and the Board of Governors.

184 101st Annual Report | 2014

Beth Anne Wilson

Associate Director, Division of International Finance,

Board of Governors

William F. Bassett and Jane E. Ihrig

Deputy Associate Directors, Division of Monetary

Affairs, Board of Governors

Joshua Gallin

Deputy Associate Director, Division of Research and

Statistics, Board of Governors

Min Wei

Assistant Director, Division of Monetary Affairs,

Board of Governors

Jeremy B. Rudd

Adviser, Division of Research and Statistics,

Board of Governors

Penelope A. Beattie

Assistant to the Secretary, Office of the Secretary,

Board of Governors

Laura Lipscomb

Section Chief, Division of Monetary Affairs,

Board of Governors

David H. Small

Project Manager, Division of Monetary Affairs,

Board of Governors

Katie Ross

Manager, Office of the Secretary,

Board of Governors

Wendy Dunn and Patrick McCabe

Senior Economists, Division of Research and

Statistics, Board of Governors

Etienne Gagnon

Senior Economist, Division of Monetary Affairs,

Board of Governors

Jonathan Rose

Economist, Division of Monetary Affairs,

Board of Governors

Achilles Sangster II

Records Management Analyst, Division of Monetary

Affairs, Board of Governors

Mark L. Mullinix

First Vice President, Federal Reserve Bank of

Richmond

David Altig and Daniel G. Sullivan

Executive Vice Presidents, Federal Reserve Banks of

Atlanta and Chicago, respectively

Cletus C. Coughlin, Mary Daly, Troy Davig,

Michael Dotsey, Joshua L. Frost,

and John A. Weinberg

Senior Vice Presidents, Federal Reserve Banks of

St. Louis, San Francisco, Kansas City, Philadelphia,

New York, and Richmond, respectively

Deborah L. Leonard,

Giovanni Olivei,

and Douglas Tillett

Vice Presidents, Federal Reserve Banks of New York,

Boston, and Chicago, respectively

Marc Giannoni

Research Officer, Federal Reserve Bank of New York

In the agenda for this meeting, it was reported that

Loretta J. Mester had been elected a member of the

Federal Open Market Committee and that she had

executed her oath of office.

Developments in Financial Markets and

the Federal Reserve’s Balance Sheet

In a joint session of the Federal Open Market Com-

mittee (FOMC) and the Board of Governors of the

Federal Reserve System, the deputy manager of the

System Open Market Account (SOMA) reported on

developments in domestic and foreign financial mar-

kets. The SOMA manager reported on the System

open market operations during the period since the

Committee met on April 29–30, 2014, outlined the

testing of the Term Deposit Facility, described the

results from the fixed-rate overnight reverse repur-

chase agreement (ON RRP) operational exercise, and

provided some possible options for adjusting the list

of counterparties eligible to participate in ON RRP

operations. The manager also noted the effects of

recent foreign central bank policy actions on the

yields on the international portion of the SOMA

portfolio and discussed ongoing staff work on

improving data collections regarding bank funding

markets. By unanimous vote, the Committee ratified

the Open Market Desk’s domestic transactions over

the intermeeting period. There were no intervention

operations in foreign currencies for the System’s

account over the intermeeting period.

Monetary Policy Normalization

Meeting participants continued their discussion of

issues associated with the eventual normalization of

the stance and conduct of monetary policy. The

Committee’s consideration of this topic was under-

taken as part of prudent planning and did not imply

that normalization would necessarily begin sometime

Attended Tuesday’s session only.

Minutes of Federal Open Market Committee Meetings | June 185

soon. A staff presentation included some possible

strategies for implementing and communicating

monetary policy during a period when the Federal

Reserve will have a very large balance sheet. In addi-

tion, the presentation outlined design features of a

potential ON RRP facility and discussed options for

the Committee’s policy of rolling over maturing

Treasury securities at auction and reinvesting princi-

pal payments on all agency debt and agency

mortgage-backed securities (MBS) in agency MBS.

Most participants agreed that adjustments in the rate

of interest on excess reserves (IOER) should play a

central role during the normalization process. It was

generally agreed that an ON RRP facility with an

interest rate set below the IOER rate could play a

useful supporting role by helping to firm the floor

under money market interest rates. One participant

thought that the ON RRP rate would be the more

effective policy tool during normalization in light of

the wider variety of counterparties eligible to partici-

pate in ON RRP operations. The appropriate size of

the spread between the IOER and ON RRP rates

was discussed, with many participants judging that a

relatively wide spread—perhaps near or above the

current level of 20 basis points—would support trad-

ing in the federal funds market and provide adequate

control over market interest rates. Several partici-

pants noted that the spread might be adjusted during

the normalization process. A couple of participants

suggested that adequate control of short-term rates

might be accomplished with a very wide spread or

even without an ON RRP facility. A few participants

commented that the Committee should also be pre-

pared to use its other policy tools, including term

deposits and term reverse repurchase agreements, if

necessary. Most participants thought that the federal

funds rate should continue to play a role in the Com-

mittee’s operating framework and communications

during normalization, with many of them indicating

a preference for continuing to announce a target

range. However, a few participants thought that,

given the degree of uncertainty about the effects of

the Committee’s tools on market rates, it might be

preferable to focus on an administered rate in com-

municating the stance of policy during the normal-

ization period. In addition, participants examined

possibilities for changing the calculation of the effec-

tive federal funds rate in order to obtain a more

robust measure of overnight bank funding rates and

to apply lessons from international efforts to develop

improved standards for benchmark interest rates.

While generally agreeing that an ON RRP facility

could play an important role in the policy normaliza-

tion process, participants discussed several potential

unintended consequences of using such a facility and

design features that could help to mitigate these con-

sequences. Most participants expressed concerns that

in times of financial stress, the facility’s counterpar-

ties could shift investments toward the facility and

away from financial and nonfinancial corporations,

possibly causing disruptions in funding that could

magnify the stress. In addition, a number of partici-

pants noted that a relatively large ON RRP facility

had the potential to expand the Federal Reserve’s

role in financial intermediation and reshape the

financial industry in ways that were difficult to antici-

pate. Participants discussed design features that could

address these concerns, including constraints on

usage either in the aggregate or by counterparty and

a relatively wide spread between the ON RRP rate

and the IOER rate that would help limit the facility’s

size. Several participants emphasized that, although

the ON RRP rate would be useful in controlling

short-term interest rates during normalization, they

did not anticipate that such a facility would be a per-

manent part of the Committee’s longer-run operat-

ing framework. Finally, a number of participants

expressed concern about conducting monetary policy

operations with nontraditional counterparties.

Participants also discussed the appropriate time for

making a change to the Committee’s policy of rolling

over maturing Treasury securities at auction and rein-

vesting principal payments on all agency debt and

agency MBS in agency MBS. It was noted that, in the

staff’s models, making a change to the Committee’s

reinvestment policy prior to the liftoff of the federal

funds rate, at the time of liftoff, or sometime thereaf-

ter would be expected to have only limited implica-

tions for macroeconomic outcomes, the Committee’s

statutory objectives, or remittances to the Treasury.

Many participants agreed that ending reinvestments

at or after the time of liftoff would be best, with

most of these participants preferring to end them

after liftoff. These participants thought that an ear-

lier change to the reinvestment policy would involve

risks to the economic outlook if it was seen as sug-

gesting that the Committee was likely to tighten

policy more rapidly than currently anticipated or if it

had unexpectedly large effects in MBS markets;

moreover, an early change could add complexity to

the Committee’s communications at a time when it

would be clearer to signal changes in policy through

186 101st Annual Report | 2014

interest rates alone. However, some participants

favored ending reinvestments prior to the first firm-

ing in policy interest rates, as stated in the Commit-

tee’s exit strategy principles announced in June 2011.

Those participants thought that such an approach

would avoid weakening the credibility of the Com-

mittee’s communications regarding normalization,

would act to modestly reduce the size of the Federal

Reserve’s balance sheet, or would help prepare the

public for the eventual rise in short-term interest

rates. Regardless of whether they preferred to intro-

duce a change to the Committee’s reinvestment

policy before or after the initial tightening in short-

term interest rates, a number of participants thought

that it might be best to follow a graduated approach

with respect to winding down reinvestments or to

manage reinvestments in a manner that would

smooth the decline in the balance sheet. Some

stressed that the details should depend on financial

and economic conditions.

Overall, participants generally expressed a preference

for a simple and clear approach to normalization that

would facilitate communication to the public and

enhance the credibility of monetary policy. It was

observed that it would be useful for the Committee to

develop and communicate its plans to the public later

this year, well before the first steps in normalizing

policy become appropriate. Most participants indi-

cated that they expected to learn more about the

effects of the Committee’s various policy tools as

normalization proceeds, and many favored maintain-

ing flexibility about the evolution of the normaliza-

tion process as well as the Committee’s longer-run

operating framework. Participants requested addi-

tional analysis from the staff on issues related to nor-

malization and agreed that it would be helpful to

continue to review these issues at upcoming meetings.

The Board meeting concluded at the end of the

discussion.

Staff Review of the Economic Situation

The information reviewed for the June 17–18 meeting

indicated that real gross domestic product (GDP)

had dropped significantly early in the year but that

economic growth had bounced back in recent

months. The average pace of employment gains

stepped up, and the unemployment rate declined

markedly in April and held steady in May, although

it was still elevated. Consumer price inflation picked

up in recent months, while measures of longer-run

inflation expectations remained stable.

Most measures of labor market conditions improved

in recent months. Total nonfarm payroll employment

expanded in April and May at a faster rate than the

average monthly pace during the previous two quar-

ters. The unemployment rate dropped to 6.3 percent

in April and remained at that level in May. However,

the labor force participation rate also declined in

April and then held steady in May, while the

employment-to-population ratio remained flat. Both

the share of workers employed part time for eco-

nomic reasons and the rate of long-duration unem-

ployment edged down in recent months, although

both measures were still high. Initial claims for

unemployment insurance decreased slightly, on net,

over the intermeeting period, and the rate of job

openings stepped up in April; nevertheless, the rate of

hiring was unchanged and remained at a modest

level.

Industrial production increased, on balance, in April

and May, as manufacturing output and production in

the mining sector expanded and more than offset a

further decline in the output of utilities from the

elevated levels recorded during the unusually cold

winter months. As a result, the rate of industrial

capacity utilization rose in recent months. Automak-

ers’ schedules indicated that the pace of light motor

vehicle assemblies would step up in the coming

months, and broader indicators of manufacturing

production, such as the readings on new orders from

national manufacturing surveys, were consistent with

moderate increases in factory output in the near

term.

Real personal consumption expenditures (PCE)

declined a little in April following strong gains in

February and March. The component of the nominal

retail sales data used by the Bureau of Economic

Analysis to construct its estimate of PCE edged

down in May, but light motor vehicle sales moved up

briskly. Recent information about key factors that

influence household spending mostly pointed to

gains in PCE in the coming months. Real disposable

income continued to rise in April, and households’

net worth likely increased as equity prices and home

values advanced further; however, consumer senti-

ment in the Thomson Reuters/University of Michi-

gan Surveys of Consumers moved down somewhat in

May and early June.

The pace of activity in the housing sector remained

subdued. Starts of new single-family homes declined

slightly, on net, in April and May, although starts of

multifamily units increased. Permits for single-family

Minutes of Federal Open Market Committee Meetings | June 187

homes, which are usually a better indicator of the

underlying pace of residential construction, increased

only a little on balance. Sales of new homes rose in

April but remained near their average monthly level

last year. Existing home sales only edged up in April

and were still below last year’s average level, while

pending home sales were little changed.

Real private expenditures for business equipment and

intellectual property products were estimated to have

increased slowly in the first quarter as a whole. In

April, nominal orders and shipments of nondefense

capital goods excluding aircraft decreased a little

after rising briskly in March. However, the level of

new orders for these capital goods remained above

the level of shipments in April, pointing to increases

in shipments in subsequent months. Other forward-

looking indicators, such as surveys of business condi-

tions, were also generally consistent with modest

increases in business equipment spending in the near

term. Nominal business spending for nonresidential

structures was essentially unchanged in April. Recent

data on the book value of inventories, along with

readings on inventories from national and regional

manufacturing surveys, did not point to significant

inventory imbalances in most industries except in the

energy sector, where inventories appeared unusually

low after having been drawn down during the winter.

Federal spending data for April and May pointed

toward only a small decline in real federal govern-

ment purchases in the second quarter, as the pace of

decreases in defense expenditures seemed to ease.

Real state and local government purchases appeared

to edge up going into the second quarter. The pay-

rolls of these governments expanded in April and

May, and nominal state and local construction

expenditures increased a little in April.

The U.S. international trade deficit widened in

March and in April. Both imports and exports recov-

ered from weak readings in February, with imports of

consumer goods, automotive products, and capital

goods rising significantly and exports of capital

goods and industrial supplies showing particular

strength.

U.S. consumer price inflation, as measured by the

PCE price index, was about 1½ percent over the

12 months ending in April, below the Committee’s

longer-run objective of 2 percent. Over the same

12-month period, consumer energy prices rose faster

than total consumer prices, while consumer food

prices climbed more slowly than overall prices; core

PCE inflation—which excludes food and energy

prices—was also around 1½ percent. In May, the

consumer price index (CPI) increased at a faster pace

than in the preceding few months; both food and

energy prices rose more briskly, and core CPI infla-

tion also stepped up. Over the 12 months ending in

May, both total and core CPI inflation were about

2 percent. Near-term inflation expectations from the

Michigan survey declined slightly, on balance, in May

and early June, while longer-term inflation expecta-

tions from the survey were little changed.

Increases in measures of labor compensation

remained modest. Compensation per hour in the

nonfarm business sector rose about 2¼ percent over

the year ending in the first quarter; with small gains

in labor productivity, unit labor costs advanced more

slowly than compensation per hour. Over the year

ending in May, average hourly earnings for all

employees increased around 2 percent.

Foreign real GDP growth slowed in the first quarter,

especially in China and some other emerging market

economies. Real GDP also increased more slowly in

Canada, in part because of severe winter weather,

and the pace of economic activity remained weak in

the euro area. Economic growth continued to be

strong in the United Kingdom, and economic activ-

ity jumped in Japan as household spending surged in

advance of April’s consumption tax hike. Indicators

for the second quarter generally suggested that for-

eign economic growth picked up from the first quar-

ter. In some advanced foreign economies, inflation

moved up recently from earlier low readings. Infla-

tion continued to be low, however, in the euro area,

and the European Central Bank (ECB) announced

additional stimulus measures.

Staff Review of the Financial Situation

On balance, financial conditions in the United States

remained supportive of growth in economic activity

and employment: The expected path of the federal

funds rate was slightly lower in the long run, yields

on longer-term Treasury securities moved down

modestly, equity prices rose, corporate bond spreads

narrowed, and the foreign exchange value of the dol-

lar was little changed.

Federal Reserve communications over the intermeet-

ing period had limited effects in financial markets.

The April FOMC statement and minutes appeared to

be generally in line with expectations, while the

Chair’s congressional testimony before the Joint Eco-

188 101st Annual Report | 2014

nomic Committee in early May and the subsequent

question-and-answer session were viewed by market

participants as suggesting marginally more accom-

modative policy than expected.

Results from the Desk’s June Survey of Primary

Dealers indicated no change in the dealers’ consensus

expectation about the most likely timing of the first

increase in the federal funds rate target but showed a

lower median longer-run level of the federal funds

rate relative to the April survey. Expectations for

Federal Reserve asset purchases were largely

unchanged. In addition, although there was signifi-

cant dispersion among dealer responses, the median

dealer expected the FOMC to end its reinvestment of

principal payments on Treasury securities, agency

debt, and agency MBS sometime after the first

increase in the federal funds rate target; in the April

survey, the median dealer had expected reinvestments

to end before liftoff.

Yields on short- and medium-term nominal Treasury

securities increased slightly, on balance, over the

intermeeting period. In contrast, yields at the long

end of the curve edged lower, continuing a downward

trend evident over much of this year. Market partici-

pants continued to discuss the decreases in long for-

ward rates since the beginning of the year and

pointed to a variety of domestic and global factors

possibly contributing to this trend, including lower

expectations for potential growth and policy rates in

the longer run, a decline in inflation risk premiums,

purchases of longer-term securities by price-

insensitive investors, unwinding of short Treasury

positions, and falling interest rate uncertainty. Meas-

ures of longer-horizon inflation compensation based

on Treasury Inflation-Protected Securities remained

about steady.

Conditions in unsecured short-term dollar funding

markets remained stable over the intermeeting

period. The Federal Reserve continued its ON RRP

exercise. Total take-up in the ON RRP exercise rose

in April and May before falling back in June. Much

of the transitory increase in take-up occurred in

response to a large seasonal reduction in outstanding

Treasury debt and an associated drop in the rates on

Treasury repurchase agreements during the first half

of the second quarter that were reversed during the

second half. In May, the Federal Reserve began an

eight-week series of test auctions of seven-day term

deposits. The number of participants and the total

amount awarded increased over the course of the

first five operations.

Broad stock price indexes rose over the intermeeting

period, apparently boosted by a more optimistic

assessment of near-term economic prospects and

likely supported by continued low interest rates.

Despite generally lackluster results for first-quarter

earnings, corporate guidance for profits in coming

quarters led to upward revisions in analysts’ forecasts

of year-ahead earnings per share for S&P 500 firms.

The VIX, an index of option-implied volatility for

one-month returns on the S&P 500 index, continued

to decline and ended the period near its historical

lows. Measures of uncertainty in other financial mar-

kets also declined; results from the Desk’s primary

dealer survey suggested this development might have

reflected low realized volatilities, generally favorable

economic news, less uncertainty for the path of mon-

etary policy, and complacency on the part of market

participants about potential risks.

Credit flows to nonfinancial corporations remained

strong. Amid low yields and reduced market volatil-

ity, gross issuance of investment- and speculative-

grade bonds rebounded in May. Commercial and

industrial (C&I) loans on banks’ balance sheets

increased and issuance of leveraged loans remained

strong. Responses to the June Senior Credit Officer

Opinion Survey on Dealer Financing Terms indi-

cated that investor demand for financing to fund pur-

chases of collateralized loan obligations rose some-

what since the beginning of the year.

Commercial real estate loans continued to increase

amid some further easing of underwriting standards

for commercial mortgages. While issuance of com-

mercial mortgage-backed securities started the year a

bit slow relative to 2013, it has picked up recently.

Bank and insurance company originations of com-

mercial mortgages expanded in the first quarter.

Mortgage credit conditions generally remained tight,

though further incremental signs of easing emerged

amid continued gains in house prices. Mortgage

interest rates declined somewhat more than long-

term Treasury yields over the intermeeting period,

while option-adjusted spreads on production-coupon

MBS narrowed. Both mortgage applications for

home purchases and refinancing applications

remained at very low levels.

Conditions in consumer credit markets were solid in

recent months. Credit card loan balances increased.

Growth in student loans moderated further but

remained solid, and outstanding auto loans contin-

Minutes of Federal Open Market Committee Meetings | June 189

ued to pick up. Issuance of auto and credit card

asset-backed securities was again robust.

The expected path of ECB policy rates implied by

market quotes for short-term interest rates fell over

the intermeeting period, as investors anticipated the

easing of policy announced by the ECB at its June

meeting. By contrast, late in the period, market par-

ticipants interpreted statements by Bank of England

Governor Carney as signaling an earlier tightening of

policy than had been anticipated, and near-term

policy rate expectations moved higher in response.

Benchmark sovereign bond yields declined modestly

in most countries, but U.K. gilt yields rose. The for-

eign exchange value of the dollar was little changed,

on balance, over the period, as the dollar appreciated

against the euro but declined against the Canadian

dollar and many emerging market currencies. Consis-

tent with some improvement in investor sentiment

toward risky assets, foreign equity prices generally

rose over the intermeeting period, and foreign sover-

eign and corporate bond spreads narrowed. In addi-

tion, both bond and equity emerging market mutual

funds saw net inflows over the period.

Staff Economic Outlook

In the economic forecast prepared by the staff for the

June FOMC meeting, real GDP growth in the first

half of this year as a whole was lower, on net, than in

the projection for the April meeting. In particular,

the available readings on exports, inventory invest-

ment, outlays for health-care services, and construc-

tion pointed to much weaker real GDP in the first

quarter than the staff had expected. However, the

staff still anticipated that real GDP growth would

rebound briskly in the second quarter, consistent

with recent indicators for consumer spending and

business investment, along with the expectation that

exports and inventory investment would return to

more normal levels and that economic activity that

had been restrained by the severe winter weather

would bounce back. Primarily because of the combi-

nation of recent downward surprises in the unem-

ployment rate and weaker-than-expected real GDP,

the staff slightly lowered its assumed pace of poten-

tial output growth this year and next and slightly

decreased its assumption for the natural rate of

unemployment over this same period. As a result, the

staff’s medium-term forecast for real GDP growth

was revised down a little on balance. Nevertheless,

the staff continued to project that real GDP would

expand at a faster pace in the second half of this year

and over the next two years than it did last year and

that it would rise more quickly than potential output.

The faster pace of real GDP growth was expected to

be supported by diminishing drag on spending from

changes in fiscal policy, increases in consumer and

business confidence, further improvements in credit

availability, and a pickup in the rate of foreign eco-

nomic growth. The expansion in economic activity

was anticipated to slowly reduce resource slack over

the projection period, and the unemployment rate

was expected to decline gradually to the staff’s esti-

mate of its longer-run natural rate in the medium

term. In the longer-run outlook, the staff slightly

lowered its assumptions for real GDP growth and the

level of equilibrium real interest rates.

The staff’s forecast for inflation in the near term was

revised up a little as recent data showed somewhat

faster increases in consumer prices than anticipated.

However, the medium-term projection for inflation

was revised down slightly, reflecting a reassessment by

the staff of the underlying trend in inflation. The staff

continued to forecast that inflation would remain

below the Committee’s longer-run objective of 2 per-

cent over the next few years. With longer-run inflation

expectations assumed to remain stable, changes in

commodity and import prices expected to be subdued,

and slack in labor and product markets anticipated to

diminish slowly, inflation was projected to rise gradu-

ally toward the Committee’s objective. The staff con-

tinued to project that inflation would reach the Com-

mittee’s objective in the longer run.

The staff’s economic projections for the June meeting

were somewhat different from the forecasts presented

at the March meeting, when the FOMC last prepared

a Summary of Economic Projections (SEP). The

staff’s June projections for the unemployment rate,

real GDP growth, and inflation over the next few

years were all a little lower, on balance, than those in

its March forecast.

The staff viewed the extent of uncertainty around its

June projections for real GDP growth and the unem-

ployment rate as roughly in line with the average over

the past 20 years. Nonetheless, the risks to the fore-

cast for real GDP growth were viewed as tilted a little

to the downside, as neither monetary policy nor fiscal

policy was seen as being well positioned to help the

economy withstand adverse shocks. At the same

time, the staff viewed the risks around its outlook for

the unemployment rate and for inflation as roughly

balanced.

190 101st Annual Report | 2014

Participants’ Views on Current Conditions

and the Economic Outlook

In conjunction with this FOMC meeting, the meeting

participants submitted their assessments of real out-

put growth, the unemployment rate, inflation, and

the target federal funds rate for each year from 2014

through 2016 and over the longer run, under each

participant’s judgment of appropriate monetary

policy.

The longer-run projections represent each

participant’s assessment of the rate to which each

variable would be expected to converge, over time,

under appropriate monetary policy and in the

absence of further shocks to the economy. These eco-

nomic projections and policy assessments are

described in the SEP, which is attached as an adden-

dum to these minutes.

In their discussion of the economic situation and the

outlook, meeting participants viewed the infor mation

received over the intermeeting period as suggesting

that economic activity was rebounding in the second

quarter following a surprisingly large decline in real

GDP in the first quarter of the year. Labor market

conditions generally improved further. Although par-

ticipants marked down their expectations for average

growth of real GDP over the first half of 2014, their

projections beginning in the second half of 2014

changed little. Over the next two and a half years,

they continued to expect economic activity to expand

at a rate sufficient to lead to a further decline in the

unemployment rate to levels close to their current

assessments of its longer-run normal value. Among

the factors anticipated to support the sustained eco-

nomic expansion were accommodative monetary

policy, diminished drag from fiscal restraint, further

gains in household net worth, improving credit con-

ditions for households and businesses, and rising

employment and wages. While inflation was still seen

as running below the Committee’s longer-run objec-

tive, longer-run inflation expectations remained

stable and the Committee anticipated that inflation

would move back toward its 2 percent objective over

the forecast period. Most participants viewed the

risks to the outlook for the economy, the labor mar-

ket, and inflation as broadly balanced.

Household spending appeared to have risen moder-

ately, on balance, in recent months, with sales of

motor vehicles, in particular, rising strongly. How-

ever, several participants read the recent soft infor-

mation on retail sales and health-care spending as

raising some concern about the underlying strength

in consumer spending. A couple of participants

noted that, to date, consumer spending had been sup-

ported importantly by gains in household net worth

while income gains had been held back by only mod-

est increases in wages. In their view, an important ele-

ment in the economic outlook was a pickup in

income, from higher wages as well as ongoing

employment gains, that would be expected to support

a sustained rise in consumer spending.

The recovery in the housing sector was reported to

have remained slow in all but a few areas of the coun-

try. Many participants expressed concern about the

still-soft indicators of residential construction, and

they discussed a range of factors that might be con-

tributing to either a temporary delay in the housing

recovery or a persistently lower level of homebuilding

than previously anticipated. Despite attractive mort-

gage rates, housing demand was seen as being

damped by such factors as restrictive credit condi-

tions, particularly for households with low credit

scores; high down payments; or low demand among

younger homebuyers, due in part to the burden of

student loan debt. Others noted supply constraints,

pointing to shortages of lots, low inventories of

desirable homes for sale, an overhang of homes asso-

ciated with foreclosures or seriously delinquent mort-

gages, or rising construction costs. Several other par-

ticipants suggested the possibility that more persis-

tent structural changes in housing demand associated

with an aging population and evolving lifestyle pref-

erences were boosting demand for multifamily units

at the expense of single-family homes.

Information from participants’ business contacts sug-

gested capital spending was likely to increase going

forward. Contacts in a number of Districts reported

that they were generally optimistic about the business

outlook, although in a couple of regions respondents

remained cautious about prospects for stronger eco-

nomic growth or worried about a renewal of federal

fiscal restraint after the current congressional budget

agreement expires. Among the industries cited as

relatively strong in recent months were transporta-

tion, energy, telecommunications, and manufactur-

ing, particularly motor vehicles. Some participants

commented that their contacts in small and medium-

sized businesses reported an improved outlook for

sales, and several heard businesses more generally dis-

cuss plans to increase capital expenditures. One par-

Four members of the Board of Governors and the presidents of

the 12 Federal Reserve Banks submitted projections. Governor

Brainard took office on June 16, 2014, and participated in the

June 17–18, 2014, meeting; she was not able to submit economic

projections.

Minutes of Federal Open Market Committee Meetings | June 191

ticipant noted that District businesses were investing

largely to meet replacement needs, while another sug-

gested that the backlog of such needs would likely

provide some impetus to business investment.

Favorable financial conditions appeared be support-

ing economic activity. While information about mort-

gage lending was mixed, a number of participants

reported increases in C&I lending by banks in their

Districts, a pickup in loan demand at banks, or better

credit quality for borrowers. In addition, small busi-

nesses reported improvements in credit availability.

However, participants also discussed whether some

recent trends in financial markets might suggest that

investors were not appropriately taking account of

risks in their investment decisions. In particular, low

implied volatility in equity, currency, and fixed-

income markets as well as signs of increased risk-

taking were viewed by some participants as an indi-

cation that market participants were not factoring in

sufficient uncertainty about the path of the economy

and monetary policy. They agreed that the Commit-

tee should continue to carefully monitor financial

conditions and to emphasize in its communications

the dependence of its policy decisions on the evolu-

tion of the economic outlook; it was also pointed out

that, where appropriate, supervisory measures should

be applied to address excessive risk-taking and asso-

ciated financial imbalances. At the same time, it was

noted that monetary policy needed to continue to

promote the favorable financial conditions required

to support the economic expansion.

In discussing economic developments abroad, a

couple of participants noted that recent monetary

policy actions by the ECB and the Bank of Japan

had improved the outlook for economic activity in

those areas and could help return inflation to target.

Several others, however, remained concerned that

persistent low inflation in Europe and Japan could

eventually erode inflation expectations more broadly.

And a couple of participants expressed uncertainty

about the outlook for economic growth in Japan and

China. In addition, several saw developments in Iraq

and Ukraine as posing possible downside risks to

global economic activity or potential upside risks to

world oil prices.

Labor market conditions generally continued to

improve over the intermeeting period. That improve-

ment was evidenced by the decline in the unemploy-

ment rate as well as by changes in other indicators,

such as solid gains in nonfarm payrolls, a low level of

new claims for unemployment insurance, uptrends in

quits and job openings, and more positive views of

job availability by households. In assessing labor

market conditions, participants again offered a range

of views on how far conditions in the labor market

were from those associated with maximum employ-

ment. Many judged that slack remained elevated, and

a number of them thought it was greater than meas-

ured by the official unemployment rate, citing, in par-

ticular, the still-high level of workers employed part

time for economic reasons or the depressed labor

force participation rate. Even so, several participants

pointed out that both long- and short-term unem-

ployment and measures that include marginally

attached workers had declined. Most participants

projected the improvement in labor market condi-

tions to continue, with the unemployment rate mov-

ing down gradually over the medium term. However,

a couple of participants anticipated that the decline

in unemployment would be damped as part-time

workers shift to full-time jobs and as nonparticipants

rejoin the labor force, while a few others commented

that they expected no lasting reversal of the decline in

labor force participation.

Aggregate wage measures continued to rise at only a

modest rate, and reports on wages from business con-

tacts and surveys in a number of Districts were

mixed. Several of those reports pointed to an absence

of wage pressures, while some others indicated that

tight labor markets or shortages of skilled workers

were leading to upward pressure on wages in some

areas or occupations and that an increasing propor-

tion of small businesses were planning to raise wages.

Participants discussed the prospects for wage

increases to pick up as slack in the labor market

diminishes. Several noted that a return to growth in

real wages in line with productivity growth would

provide welcome support for household spending.

Readings on a range of price measures—including

the PCE price index, the CPI, and a number of the

analytical measures developed at the Reserve

Banks—appeared to provide evidence that inflation

had moved up recently from low levels earlier in the

year, consistent with the Committee’s forecast of a

gradual increase in inflation over the medium term.

Reports from business contacts were mixed, spanning

an absence of price pressures in some Districts and

rising input costs in others. Some participants

expressed concern about the persistence of below-

trend inflation, and a couple of them suggested that

the Committee may need to allow the unemployment

rate to move below its longer-run normal level for a

time in order keep inflation expectations anchored

192 101st Annual Report | 2014

and return inflation to its 2 percent target, though

one participant emphasized the risks of doing so. In

contrast, some others expected a faster pickup in

inflation or saw upside risks to inflation and inflation

expectations because they anticipated a more rapid

decline in economic slack.

During their consideration of issues related to mon-

etary policy over the medium term, participants gen-

erally supported the Committee’s current guidance

about the likely path of its asset purchases and about

its approach to determining the timing of the first

increase in the federal funds rate and the path of the

policy rate thereafter. Participants offered views on a

range of issues related to policy communications.

Some participants suggested that the Committee’s

communications about its forward guidance should

emphasize more strongly that its policy decisions

would depend on its ongoing assessment across a

range of indicators of economic activity, labor mar-

ket conditions, inflation and inflation expectations,

and financial market developments. In that regard,

circumstances that might entail either a slower or a

more rapid removal of policy accommodation were

cited. For example, a number of participants noted

their concern that a more gradual approach might be

appropriate if forecasts of above-trend economic

growth later this year were not realized. And a couple

suggested that the Committee might need to

strengthen its commitment to maintain sufficient

policy accommodation to return inflation to its tar-

get over the medium term in order to prevent an

undesirable decline in inflation expectations. Alterna-

tively, some other participants expressed concern that

economic growth over the medium run might be

faster than currently expected or that the rate of

growth of potential output might be lower than cur-

rently expected, calling for a more rapid move to

begin raising the federal funds rate in order to avoid

significantly overshooting the Committee’s unem-

ployment and inflation objectives.

While the current asset purchase program is not on a

preset course, participants generally agreed that if the

economy evolved as they anticipated, the program

would likely be completed later this year. Some com-

mittee members had been asked by members of the

public whether, if tapering in the pace of purchases

continues as expected, the f inal reduction would

come in a single $15 billion per month reduction or

in a $10 billion reduction followed by a $5 billion

reduction. Most participants viewed this as a techni-

cal issue with no substantive macroeconomic conse-

quences and no consequences for the eventual deci-

sion about the timing of the first increase in the fed-

eral funds rate—a decision that will depend on the

Committee’s evolving assessments of actual and

expected progress toward its objectives. In light of

these considerations, participants generally agreed

that if incoming information continued to support its

expectation of improvement in labor market condi-

tions and a return of inflation toward its longer-run

objective, it would be appropriate to complete asset

purchases with a $15 billion reduction in the pace of

purchases in order to avoid having the small, remain-

ing level of purchases receive undue focus among

investors. If the economy progresses about as the

Committee expects, warranting reductions in the

pace of purchases at each upcoming meeting, this

final reduction would occur following the October

meeting.

Committee Policy Action

In their discussion of monetary policy in the period

ahead, members judged that information received

since the Federal Open Market Committee met in

April indicated that economic activity was rebound-

ing from the decline in the first quarter of the year.

Labor market indicators generally showed further

improvement. The unemployment rate, though lower,

remained elevated. Household spending appeared to

be rising moderately and business fixed investment

resumed its advance, while the recovery in the hous-

ing sector remained slow. Fiscal policy was restrain-

ing economic growth, although the extent of restraint

was diminishing. The Committee expected that, with

appropriate policy accommodation, economic activ-

ity would expand at a moderate pace and labor mar-

ket conditions would continue to improve gradually,

moving toward those the Committee judges consis-

tent with its dual mandate. Members saw the risks to

the outlook for the economy and the labor market as

nearly balanced. Inflation was running below the

Committee’s longer-run objective, but the Committee

anticipated that with stable inflation expectations

and strengthening economic activity, inflation would,

over time, return to the Committee’s 2 percent objec-

tive. However, members continued to recognize that

inflation persistently below its longer-run objective

could pose risks to economic performance and

agreed to monitor inflation developments closely for

evidence that inflation was moving back toward its

objective over the medium term.

Members judged that the economy had sufficient

underlying strength to support ongoing improvement

in labor market conditions and a return of inflation

Minutes of Federal Open Market Committee Meetings | June 193

toward the Committee’s longer-run 2 percent objec-

tive, and thus agreed that a further measured reduc-

tion in the pace of the Committee’s asset purchases

was appropriate at this meeting. Accordingly, the

Committee agreed that beginning in July, it would

add to its holdings of agency MBS at a pace of

$15 billion per month rather than $20 billion per

month, and it would add to its holdings of Treasury

securities at a pace of $20 billion per month rather

than $25 billion per month. Members again judged

that, if incoming information broadly supported the

Committee’s expectations for ongoing progress

toward meeting its dual objectives of maximum

employment and inflation of 2 percent, the Commit-

tee would likely reduce the pace of asset purchases in

further measured steps at future meetings. The Com-

mittee reiterated, however, that purchases were not

on a preset course, and that its decisions about the

pace of purchases would remain contingent on its

outlook for the labor market and inflation as well as

its assessment of the likely efficacy and costs of such

purchases.

The Committee agreed to maintain its target range

for the federal funds rate and to reiterate its forward

guidance about how it would assess the appropriate

timing of the first increase in the target rate and the

anticipated behavior of the federal funds rate after it

is raised. The guidance continued to emphasize that

the Committee’s decisions about how long to main-

tain the current target range for the federal funds rate

would depend on its assessment of actual and

expected progress toward its objectives of maximum

employment and 2 percent inflation. The Committee

again stated that it currently anticipated that it likely

would be appropriate to maintain the current target

range for the federal funds rate for a considerable

time after the asset purchase program ends, especially

if projected inflation continued to run below the

Committee’s 2 percent longer-run goal, and provided

that longer-term inflation expectations remained well

anchored. The forward guidance also reiterated the

Committee’s expectation that even after employment

and inflation are near mandate-consistent levels, eco-

nomic conditions may, for some time, warrant keep-

ing the target federal funds rate below levels the

Committee views as normal in the longer run.

At the conclusion of the discussion, the Committee

voted to authorize and direct the Federal Reserve

Bank of New York, until it was instructed otherwise,

to execute transactions in the SOMA in accordance

with the following domestic policy directive:

“Consistent with its statutory mandate, the Fed-

eral Open Market Committee seeks monetary

and financial conditions that will foster maxi-

mum employment and price stability. In particu-

lar, the Committee seeks conditions in reserve

markets consistent with federal funds trading in

a range from 0 to ¼ percent. The Committee

directs the Desk to undertake open market

operations as necessary to maintain such condi-

tions. Beginning in July, the Desk is directed to

purchase longer-term Treasury securities at a

pace of about $20 billion per month and to pur-

chase agency mortgage-backed securities at a

pace of about $15 billion per month. The Com-

mittee also directs the Desk to engage in dollar

roll and coupon swap transactions as necessary

to facilitate settlement of the Federal Reserve’s

agency mortgage-backed securities transactions.

The Committee directs the Desk to maintain its

policy of rolling over maturing Treasury securi-

ties into new issues and its policy of reinvesting

principal payments on all agency debt and

agency mortgage-backed securities in agency

mortgage-backed securities. The System Open

Market Account manager and the secretary will

keep the Committee informed of ongoing devel-

opments regarding the System’s balance sheet

that could affect the attainment over time of the

Committee’s objectives of maximum employ-

ment and price stability.”

The vote encompassed approval of the statement

below to be released at 2:00 p.m.:

“Information received since the Federal Open

Market Committee met in April indicates that

growth in economic activity has rebounded in

recent months. Labor market indicators gener-

ally showed further improvement. The unem-

ployment rate, though lower, remains elevated.

Household spending appears to be rising moder-

ately and business fixed investment resumed its

advance, while the recovery in the housing sector

remained slow. Fiscal policy is restraining eco-

nomic growth, although the extent of restraint is

diminishing. Inflation has been running below

the Committee’s longer-run objective, but

longer-term inflation expectations have

remained stable.

Consistent with its statutory mandate, the Com-

mittee seeks to foster maximum employment

and price stability. The Committee expects that,

194 101st Annual Report | 2014

with appropriate policy accommodation, eco-

nomic activity will expand at a moderate pace

and labor market conditions will continue to

improve gradually, moving toward those the

Committee judges consistent with its dual man-

date. The Committee sees the risks to the out-

look for the economy and the labor market as

nearly balanced. The Committee recognizes that

inflation persistently below its 2 percent objec-

tive could pose risks to economic performance,

and it is monitoring inflation developments care-

fully for evidence that inflation will move back

toward its objective over the medium term.

The Committee currently judges that there is

sufficient underlying strength in the broader

economy to support ongoing improvement in

labor market conditions. In light of the cumula-

tive progress toward maximum employment and

the improvement in the outlook for labor market

conditions since the inception of the current

asset purchase program, the Committee decided

to make a further measured reduction in the

pace of its asset purchases. Beginning in July,

the Committee will add to its holdings of agency

mortgage-backed securities at a pace of $15 bil-

lion per month rather than $20 billion per

month, and will add to its holdings of longer-

term Treasury securities at a pace of $20 billion

per month rather than $25 billion per month.

The Committee is maintaining its existing policy

of reinvesting principal payments from its hold-

ings of agency debt and agency mortgage-

backed securities in agency mortgage-backed

securities and of rolling over maturing Treasury

securities at auction. The Committee’s sizable

and still-increasing holdings of longer-term

securities should maintain downward pressure

on longer-term interest rates, support mortgage

markets, and help to make broader financial

conditions more accommodative, which in turn

should promote a stronger economic recovery

and help to ensure that inflation, over time, is at

the rate most consistent with the Committee’s

dual mandate.

The Committee will closely monitor incoming

information on economic and financial develop-

ments in coming months and will continue its

purchases of Treasury and agency mortgage-

backed securities, and employ its other policy

tools as appropriate, until the outlook for the

labor market has improved substantially in a

context of price stability. If incoming informa-

tion broadly supports the Committee’s expecta-

tion of ongoing improvement in labor market

conditions and inflation moving back toward its

longer-run objective, the Committee will likely

reduce the pace of asset purchases in further

measured steps at future meetings. However,

asset purchases are not on a preset course, and

the Committee’s decisions about their pace will

remain contingent on the Committee’s outlook

for the labor market and inflation as well as its

assessment of the likely efficacy and costs of

such purchases.

To support continued progress toward maxi-

mum employment and price stability, the Com-

mittee today reaffirmed its view that a highly

accommodative stance of monetary policy

remains appropriate. In determining how long to

maintain the current 0 to ¼ percent target range

for the federal funds rate, the Committee will

assess progress—both realized and expected—

toward its objectives of maximum employment

and 2 percent inflation. This assessment will take

into account a wide range of information,

including measures of labor market conditions,

indicators of inflation pressures and inflation

expectations, and readings on financial develop-

ments. The Committee continues to anticipate,

based on its assessment of these factors, that it

likely will be appropriate to maintain the current

target range for the federal funds rate for a con-

siderable time after the asset purchase program

ends, especially if projected inflation continues

to run below the Committee’s 2 percent longer-

run goal, and provided that longer-term infla-

tion expectations remain well anchored.

When the Committee decides to begin to remove

policy accommodation, it will take a balanced

approach consistent with its longer-run goals of

maximum employment and inflation of 2 per-

cent. The Committee currently anticipates that,

even after employment and inflation are near

mandate-consistent levels, economic conditions

may, for some time, warrant keeping the target

federal funds rate below levels the Committee

views as normal in the longer run.”

Voting for this action: Janet L. Yellen, William C.

Dudley, Lael Brainard, Stanley Fischer, Richard W.

Minutes of Federal Open Market Committee Meetings | June 195

Fisher, Narayana Kocherlakota, Loretta J. Mester,

Charles I. Plosser, Jerome H. Powell, and Daniel K.

Tarullo.

Voting against this action: None.

It was agreed that the next meeting of the Committee

would be held on Tuesday–Wednesday, July 29–30.

The meeting adjourned at 11:10 a.m. on June 18,

2014.

Notation Vote

By notation vote completed on May 19, 2014, the

Committee unanimously approved the minutes of the

Committee meeting held on April 29–30, 2014.

William B. English

Secretary

196 101st Annual Report | 2014

Addendum:

Summary of Economic Projections

In conjunction with the June 17–18, 2014, Federal

Open Market Committee (FOMC) meeting, meeting

participants submitted their assessments of real out-

put growth, the unemployment rate, inflation, and

the target federal funds rate for each year from 2014

through 2016 and over the longer run.

Each partici-

pant’s assessment was based on information available

at the time of the meeting plus his or her judgment of

appropriate monetary policy and assumptions about

the factors likely to affect economic outcomes. The

longer-run projections represent each participant’s

judgment of the value to which each variable would

be expected to converge, over time, under appropriate

monetary policy and in the absence of further shocks

to the economy. “Appropriate monetary policy” is

defined as the future path of policy that each partici-

pant deems most likely to foster outcomes for eco-

nomic activity and inflation that best satisfy his or

her individual interpretation of the Federal Reserve’s

objectives of maximum employment and stable

prices.

Overall, FOMC participants expected that, under

appropriate monetary policy, economic growth

would pick up notably in the second half of 2014 and

remain in 2015 and 2016 above their estimates of the

longer-run normal rate of economic growth. Consis-

tent with that outlook, the unemployment rate was

projected to continue to decline toward its longer-run

normal level over the projection period (

table 1 and

figure 1). The majority of participants projected that

inflation, as measured by the annual change in the

price index for personal consumption expenditures

(PCE), would rise to a level at or slightly below the

Committee’s 2 percent objective in 2016.

The majority of participants expected that highly

accommodative monetary policy would remain

appropriate over the next few years to foster progress

toward the Federal Reserve’s longer-run objectives.

As shown in

figure 2, all but one of the participants

anticipated that it would be appropriate to wait at

least until 2015 before beginning to increase the fed-

eral funds rate, and most projected that it would then

be appropriate to raise the target federal funds rate

fairly gradually. Given their economic outlooks, most

participants judged that it would be appropriate to

continue gradually slowing the pace of the Commit-

tee’s purchases of longer-term securities and com-

plete the asset purchase program later this year.

Most participants saw the uncertainty associated

with their outlooks for economic growth, the unem-

Four members of the Board of Governors and the presidents of

the 12 Federal Reserve Banks submitted projections. Governor

Brainard took office on June 16, 2014, and participated in the

June 17–18, 2014, FOMC meeting; she was not able to submit

economic projections.

Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, June 2014

Percent

Variable

Central tendency

Range

2014 2015 2016 Longer run 2014 2015 2016 Longer run

Change in real GDP 2.1 to 2.3 3.0 to 3.2 2.5 to 3.0 2.1 to 2.3 1.9 to 2.4 2.2 to 3.6 2.2 to 3.2 1.8 to 2.5

March projection 2.8 to 3.0 3.0 to 3.2 2.5 to 3.0 2.2 to 2.3 2.1 to 3.0 2.2 to 3.5 2.2 to 3.4 1.8 to 2.4

Unemployment rate 6.0 to 6.1 5.4 to 5.7 5.1 to 5.5 5.2 to 5.5 5.8 to 6.2 5.2 to 5.9 5.0 to 5.6 5.0 to 6.0

March projection 6.1 to 6.3 5.6 to 5.9 5.2 to 5.6 5.2 to 5.6 6.0 to 6.5 5.4 to 5.9 5.1 to 5.8 5.2 to 6.0

PCE inflation 1.5 to 1.7 1.5 to 2.0 1.6 to 2.0 2.0 1.4 to 2.0 1.4 to 2.4 1.5 to 2.0 2.0

March projection 1.5 to 1.6 1.5 to 2.0 1.7 to 2.0 2.0 1.3 to 1.8 1.5 to 2.4 1.6 to 2.0 2.0

Core PCE inflation

1.5 to 1.6 1.6 to 2.0 1.7 to 2.0 1.4 to 1.8 1.5 to 2.4 1.6 to 2.0

March projection 1.4 to 1.6 1.7 to 2.0 1.8 to 2.0 1.3 to 1.8 1.5 to 2.4 1.6 to 2.0

Note: Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are from the fourth quarter of the previous year to the fourth

quarter of the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index for personal consumption expenditures

(PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the

year indicated. Each participant’s projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each participant’s

assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy. The

March projections were made in conjunction with the meeting of the Federal Open Market Committee on March 18–19, 2014.

The central tendency excludes the three highest and three lowest projections for each variable in each year.

The range for a variable in a given year includes all participants’ projections, from lowest to highest, for that variable in that year.

Longer-run projections for core PCE inflation are not collected.

Minutes of Federal Open Market Committee Meetings | June 197

Figure 1. Central tendencies and ranges of economic projections, 2014–16 and over the longer run

Change in real GDP

Percent

2009 2010 2011 2012 2013 2014 2015 2016 Longer

run

Central tendency of projections

Range of projections

Actual

Unemployment rate

Percent

2009 2010 2011 2012 2013 2014 2015 2016 Longer

run

PCE ination

Percent

2009 2010 2011 2012 2013 2014 2015 2016 Longer

run

Core PCE ination

Percent

2009 2010 2011 2012 2013 2014 2015 2016 Longer

run

Note: Definitions of variables are in the general note to table 1. The data for the actual values of the variables are annual.

198 101st Annual Report | 2014

Figure 2. Overview of FOMC participants’ assessments of appropriate monetary policy

Appropriate timing of policy rming

Number of participants

2014 2015 2016

Appropriate pace of policy rming

Percent

Target federal funds rate at year-end

2014 2015 2016 Longer run

Note: In the upper panel, the height of each bar denotes the number of FOMC participants who judge that, under appropriate monetary policy, the first increase in the target fed-

eral funds rate from its current range of 0 to ¼ percent will occur in the specified calendar year. In March 2014, the numbers of FOMC participants who judged that the first

increase in the target federal funds rate would occur in 2014, 2015, and 2016 were, respectively, 1, 13, and 2. In the lower panel, each shaded circle indicates the value

(rounded to the nearest ¼ percentage point) of an individual participant’s judgment of the appropriate level of the target federal funds rate at the end of the specified calendar

year or over the longer run.

Minutes of Federal Open Market Committee Meetings | June 199

ployment rate, and inflation as similar to that of the

past 20 years. In addition, most participants consid-

ered the risks to the outlook for real GDP growth

and the unemployment rate to be broadly balanced,

and a majority saw the risks to inflation as broadly

balanced. However, some saw the risks to their fore-

casts for economic growth or inflation as tilted to the

downside, and a couple saw the risks to their fore-

casts for inflation as tilted to the upside.

The Outlook for Economic Activity

Participants generally projected that, conditional on

their individual assumptions about appropriate mon-

etary policy, real GDP growth would pick up notably

in the second half of this year and remain in 2015

and 2016 above their estimates of the longer-run nor-

mal rate of output growth. All participants revised

down their projections of real GDP growth for the

first half of 2014 compared with their projections in

March, but most left their forecasts for the remainder

of the projection period largely unchanged. Partici-

pants generally judged that real GDP growth in the

first half of this year was held down by transitory

factors depressing output early in the year, and they

pointed to a number of factors that they expected

would continue to contribute to a pickup in eco-

nomic growth later this year and next, including ris-

ing household net worth, diminished restraint from

fiscal policy, improving labor market conditions, and

highly accommodative monetary policy. The central

tendencies of participants’ projections for real GDP

growth were 2.1 to 2.3 percent in 2014, 3.0 to 3.2 per-

cent in 2015, and 2.5 to 3.0 percent in 2016. The cen-

tral tendency for the longer-run normal rate of

growth of real GDP was 2.1 to 2.3 percent, only

slightly lower than in March.

Participants continued to anticipate a gradual decline

in the unemployment rate over the projection period.

The central tendencies of participants’ forecasts for

the unemployment rate in the fourth quarter of each

year were 6.0 to 6.1 percent in 2014, 5.4 to 5.7 per-

cent in 2015, and 5.1 to 5.5 percent in 2016. Nearly

all participants revised down their projected paths for

the unemployment rate this year and next relative to

their March projections, with the majority pointing

to the decline in the unemployment rate in recent

months as a reason for the downward revision. The

central tendency of participants’ estimates of the

longer-run normal rate of unemployment that would

prevail under appropriate monetary policy and in the

absence of further shocks to the economy also edged

down, to 5.2 to 5.5 percent. Most participants pro-

jected that the unemployment rate would be close to

their individual estimates of its longer-run level at the

end of 2016.

Figures 3.A and 3.B show that participants contin-

ued to hold a range of views regarding the likely out-

comes for real GDP growth and the unemployment

rate over the next two years. The diversity of views

reflected their individual assessments of the rate at

which the headwinds that have been holding back the

pace of the economic recovery would abate and of

the anticipated path for foreign economic activity, the

trajectory for growth in household net worth, and the

appropriate path of monetary policy. Relative to

March, the dispersion of participants’ projections for

real GDP growth narrowed a bit in 2014 but was

largely unchanged over the next two years, and the

dispersion of projections for the unemployment rate

over the entire projection period was little changed.

The Outlook for Inflation

Compared with March, the central tendencies of

participants’ projections for inflation were largely

unchanged for all years in the projection period,

although many participants marked up a bit their

projections for inflation in 2014. The vast majority of

participants anticipated that, on average, both head-

line and core inflation would rise gradually over the

next few years, and the majority of participants

expected headline inflation to be at or slightly below

the Committee’s 2 percent objective in 2016. Specifi-

cally, the central tendencies for PCE inflation were

1.5 to 1.7 percent in 2014, 1.5 to 2.0 percent in 2015,

and 1.6 to 2.0 percent in 2016. The central tendencies

of the forecasts for core inflation were broadly simi-

lar to those for the headline measure. It was noted

that some combination of stable inflation expecta-

tions and steadily diminishing resource slack was

likely to contribute to a gradual rise of inflation back

toward the Committee’s longer-run objective of

2 percent.

Figures 3.C and 3.D provide information on the

diversity of participants’ views about the outlook for

inflation. The ranges of participants’ projections for

overall inflation were little changed relative to March.

The forecasts for PCE inflation in 2016 were at or

below the Committee’s longer-run objective. Similar

to the projections for headline inflation, the projec-

tions for core inflation in 2016 were concentrated at

or below 2 percent.

200 101st Annual Report | 2014

Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2014–16 and over the longer run

2014

Number of participants

1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6

- - - - - - - - - -

1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7

Percent range

June projections

March projections

2015

1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6

- - - - - - - - - -

1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7

2016

1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6

- - - - - - - - - -

1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7

Longer run

1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6

- - - - - - - - - -

1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7

Note: Definitions of variables are in the general note to table 1.

Minutes of Federal Open Market Committee Meetings | June 201

Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2014–16 and over the longer run

2014

Number of participants

5.0 5.2 5.4 5.6 5.8 6.0 6.2 6.4

- - - - - - - -

5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5

Percent range

June projections

March projections

2015

5.0 5.2 5.4 5.6 5.8 6.0 6.2 6.4

- - - - - - - -

5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5

2016

5.0 5.2 5.4 5.6 5.8 6.0 6.2 6.4

- - - - - - - -

5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5

Longer run

5.0 5.2 5.4 5.6 5.8 6.0 6.2 6.4

- - - - - - - -

5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5

Note: Definitions of variables are in the general note to table 1.

202 101st Annual Report | 2014

Figure 3.C. Distribution of participants’ projections for PCE inflation, 2014–16 and over the longer run

2014

Number of participants

1.3 1.5 1.7 1.9 2.1 2.3

- - - - - -

1.4 1.6 1.8 2.0 2.2 2.4

Percent range

June projections

March projections

2015

1.3 1.5 1.7 1.9 2.1 2.3

- - - - - -

1.4 1.6 1.8 2.0 2.2 2.4

2016

1.3 1.5 1.7 1.9 2.1 2.3

- - - - - -

1.4 1.6 1.8 2.0 2.2 2.4

Longer run

1.3 1.5 1.7 1.9 2.1 2.3

- - - - - -

1.4 1.6 1.8 2.0 2.2 2.4

Note: Definitions of variables are in the general note to table 1.

Minutes of Federal Open Market Committee Meetings | June 203

Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2014–16

2014

Number of participants

1.3 1.5 1.7 1.9 2.1 2.3

- - - - - -

1.4 1.6 1.8 2.0 2.2 2.4

Percent range

June projections

March projections

2015

1.3 1.5 1.7 1.9 2.1 2.3

- - - - - -

1.4 1.6 1.8 2.0 2.2 2.4

2016

1.3 1.5 1.7 1.9 2.1 2.3

- - - - - -

1.4 1.6 1.8 2.0 2.2 2.4

Note: Definitions of variables are in the general note to table 1.

204 101st Annual Report | 2014

Appropriate Monetary Policy

As indicated in figure 2, nearly all participants

judged that low levels of the federal funds rate would

remain appropriate for the next few years. In particu-

lar, 12 participants thought that the first increase in

the target federal funds rate would not be warranted

until sometime in 2015, and 3 judged that policy

firming would likely not be appropriate until 2016.

Only 1 participant thought that an increase in the

federal funds rate would be warranted in 2014.

All participants projected that the unemployment

rate would be below 6 percent at the end of the year

in which they judged the initial increase in the federal

funds rate to be warranted, and all but one antici-

pated that inflation would be at or below the Com-

mittee’s longer-run objective at that time. Most par-

ticipants projected that the unemployment rate

would remain above their estimates of its longer-run

normal level at the end of the year in which they saw

the federal funds rate increasing from its effective

lower bound.

Figure 3.E provides the distribution of participants’

judgments regarding the appropriate level of the tar-

get federal funds rate at the end of each calendar year

from 2014 to 2016 and over the longer run. As noted

earlier, nearly all participants judged that economic

conditions would warrant maintaining the current

exceptionally low level of the federal funds rate at

least until 2015. Relative to their projections in

March, the median values of the federal funds rate at

the end of 2015 and 2016 increased 13 basis points

and 25 basis points to 1.13 percent and 2.50 percent,

respectively, while the mean values rose 7 basis points

and 11 basis points to 1.18 percent and 2.53 percent,

respectively. The dispersion of projections for the

value of the federal funds rate was little changed in

2015 but widened slightly in 2016. Most participants

expected that the federal funds rate at the end of

2016 would still be significantly below their indi-

vidual assessments of its longer-run level. For about

half of these participants, the low level of the federal

funds rate at that time was associated with inflation

well below the Committee’s 2 percent objective. In

contrast, the rest of these participants saw the federal

funds rate at the end of 2016 as still significantly low

despite their projections that the unemployment rate

would be close to or below their individual longer-

run projections and inflation would be at or close to

2 percent at that time. These participants cited some

combination of a lower equilibrium real interest rate,

continuing headwinds from the financial crisis and

subsequent recession, and a desire to raise the federal

funds rate at a gradual pace after liftoff as explana-

tions for the still-low level of the projected federal

funds rate at the end of 2016. A couple of partici-

pants also mentioned broader measures of labor

market slack that may take longer to return to their

normal levels than the unemployment rate. Estimates

of the longer-run level of the federal funds rate

ranged from 3¼ to about 4¼ percent, reflecting the

Committee’s inflation objective of 2 percent and par-

ticipants’ individual judgments regarding the appro-

priate longer-run level of the real federal funds rate in

the absence of further shocks to the economy. Com-

pared with March, some participants revised down

their estimates of the longer-run federal funds rate,

with a lower assessment of the longer-run level of

potential output growth cited as a contributing factor

for the majority of those revisions. As a result, the

median estimate of the longer-run federal funds rate

shifted down to 3.75 percent from 4 percent in

March, while its mean value declined 11 basis points

to 3.78 percent.

Participants also described their views regarding the

appropriate path of the Federal Reserve’s balance

sheet. Conditional on their respective economic out-

looks, most participants judged that it would be

appropriate to continue to reduce the pace of the

Committee’s purchases of longer-term securities in

measured steps and to conclude the purchases later

this year. A couple of participants judged that a

more rapid reduction in the pace of purchases and an

earlier end to the asset purchase program would be

appropriate.

Participants’ views of the appropriate path for mon-

etary policy were informed by their judgments about

the state of the economy, including the values of the

unemployment rate and other labor market indica-

tors that would be consistent with maximum employ-

ment, the extent to which the economy was currently

falling short of maximum employment, the prospects

for inflation to return to the Committee’s longer-

term objective of 2 percent, and the balance of risks

around the outlook. Many participants also men-

tioned the prescriptions of various monetary policy

rules as factors they considered in judging the appro-

priate path for the federal funds rate.

Uncertainty and Risks

The vast majority of participants continued to judge

the levels of uncertainty about their projections for

real GDP growth and the unemployment rate as

Minutes of Federal Open Market Committee Meetings | June 205

Figure 3.E. Distribution of participants’ projections for the target federal funds rate, 2014–16 and over the longer run

2014

Number of participants

0.00 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13

- - - - - - - - - - - - - - - - -

0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37

Percent range

June projections

March projections

2015

0.00 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13

- - - - - - - - - - - - - - - - -

0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37

2016

0.00 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13

- - - - - - - - - - - - - - - - -

0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37

Longer run

0.00 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13

- - - - - - - - - - - - - - - - -

0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37

Note: The target federal funds rate is measured as the level of the target rate at the end of the calendar year or in the longer run.

206 101st Annual Report | 2014

broadly similar to the norms during the previous

20 years (

figure 4).

Most participants continued to

judge the risks to real GDP growth and the unem-

ployment rate to be broadly balanced, although a few

participants viewed the risks as weighted to the

downside, reflecting, for example, their concerns

about the limited ability of monetary policy at the

zero lower bound to respond to negative shocks to

the economy as well as external economic and geopo-

litical risks. Similar to March, nearly all participants

continued to judge the risks to the unemployment

rate to be broadly balanced.

Almost all participants saw the level of uncertainty

and the balance of risks around their forecasts for

overall PCE inflation and core inflation as little

changed from March. Most participants continued to

judge the levels of uncertainty associated with their

forecasts for the two inflation measures to be broadly

similar to historical norms, and a majority continued

to see the risks to those projections as broadly bal-

anced. A few participants, however, viewed the risks

to their inflation forecasts as tilted to the downside,

reflecting, for example, the possibilities that the

recent low levels of inflation could prove more persis-

tent than anticipated, and that the upward pull on

prices from inflation expectations might be weaker

than assumed. Conversely, two participants saw

upside risks to inflation, with one citing uncertainty

about the timing and efficacy of the Committee’s

withdrawal of accommodation.

Table 2 provides estimates of the forecast uncertainty for the

change in real GDP, the unemployment rate, and total con-

sumer price inflation over the period from 1994 through 2013.

At the end of this summary, the box “

Forecast Uncertainty”

discusses the sources and interpretation of uncertainty in the

economic forecasts and explains the approach used to assess the

uncertainty and risks attending the participants’ projections.

Table 2. Average historical projection error ranges

Percentage points

Variable 2014 2015 2016

Change in real GDP

±1.4 ±2.0 ±2.1

Unemployment rate

±0.4 ±1.2 ±1.8

Total consumer prices

±0.8 ±1.0 ±1.0

Note: Error ranges shown are measured as plus or minus the root mean squared

error of projections for 1994 through 2013 that were released in the spring by

various private and government forecasters. As described in the box “

Forecast

Uncertainty

,” under certain assumptions, there is about a 70 percent probability

that actual outcomes for real GDP, unemployment, and consumer prices will be in

ranges implied by the average size of projection errors made in the past. For more

information, see David Reifschneider and Peter Tulip (2007), “Gauging the

Uncertainty of the Economic Outlook from Historical Forecasting Errors,” Finance

and Economics Discussion Series 2007-60 (Washington: Board of Governors of

the Federal Reserve System, November), available at

http://www.federalreserve

.gov/pubs/feds/2007/200760/200760abs.html

; and Board of Governors of the

Federal Reserve System, Division of Research and Statistics (2014), “Updated

Historical Forecast Errors,” memorandum, April 9,

http://www.federalreserve.gov/

foia/files/20140409-historical-forecast-errors.pdf

Definitions of variables are in the general note to table 1.

Measure is the overall consumer price index, the price measure that has been

most widely used in government and private economic forecasts. Projection

is percent change, fourth quarter of the previous year to the fourth quarter of

the year indicated.

Minutes of Federal Open Market Committee Meetings | June 207

Figure 4. Uncertainty and risks in economic projections

Uncertainty about GDP growth

Number of participants Number of participants

Lower Broadly Higher

similar

Lower Broadly Higher

similar

Lower Broadly Higher

similar

Lower Broadly Higher

similar

June projections

March projections

Uncertainty about the unemployment rate

Uncertainty about PCE ination

Uncertainty about core PCE ination

Risks to GDP growth

Weighted to Weighted toBroadly

downside balanced upside

Weighted to Weighted toBroadly

downside balanced upside

Weighted to Weighted toBroadly

downside balanced upside

Weighted to Weighted toBroadly

downside balanced upside

June projections

March projections

Risks to the unemployment rate

Risks to PCE ination

Risks to core PCE ination

Note: For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.” Definitions of variables are in the general note to table 1.

208 101st Annual Report | 2014

Forecast Uncertainty

The economic projections provided by the members

of the Board of Governors and the presidents of the

Federal Reserve Banks inform discussions of mon-

etary policy among policymakers and can aid public

understanding of the basis for policy actions. Con-

siderable uncertainty attends these projections, how-

ever. The economic and statistical models and rela-

tionships used to help produce economic forecasts

are necessarily imperfect descriptions of the real

world, and the future path of the economy can be

affected by myriad unforeseen developments and

events. Thus, in setting the stance of monetary

policy, participants consider not only what appears to

be the most likely economic outcome as embodied in

their projections, but also the range of alternative

possibilities, the likelihood of their occurring, and the

potential costs to the economy should they occur.

Table 2 summarizes the average historical accuracy

of a range of forecasts, including those reported in

past Monetary Policy Reports and those prepared by

the Federal Reserve Board’s staff in advance of

meetings of the Federal Open Market Committee.

The projection error ranges shown in the table illus-

trate the considerable uncertainty associated with

economic forecasts. For example, suppose a partici-

pant projects that real gross domestic product (GDP)

and total consumer prices will rise steadily at annual

rates of, respectively, 3 percent and 2 percent. If the

uncertainty attending those projections is similar to

that experienced in the past and the risks around the

projections are broadly balanced, the numbers

reported in table 2 would imply a probability of about

70 percent that actual GDP would expand within a

range of 1.6 to 4.4 percent in the current year, 1.0 to

5.0 percent in the second year, and 0.9 to 5.1 percent

in the third year. The corresponding 70 percent confi-

dence intervals for overall inflation would be 1.2 to

2.8 percent in the current year and 1.0 to 3.0 percent

in the second and third years.

Because current conditions may differ from those

that prevailed, on average, over history, participants

provide judgments as to whether the uncertainty

attached to their projections of each variable is

greater than, smaller than, or broadly similar to typi-

cal levels of forecast uncertainty in the past, as

shown in table 2. Participants also provide judgments

as to whether the risks to their projections are

weighted to the upside, are weighted to the down-

side, or are broadly balanced. That is, participants

judge whether each variable is more likely to be

above or below their projections of the most likely

outcome. These judgments about the uncertainty

and the risks attending each participant’s projections

are distinct from the diversity of participants’ views

about the most likely outcomes. Forecast uncertainty

is concerned with the risks associated with a particu-

lar projection rather than with divergences across a

number of different projections.

As with real activity and inflation, the outlook for the

future path of the federal funds rate is subject to con-

siderable uncertainty. This uncertainty arises primarily

because each participant’s assessment of the appro-

priate stance of monetary policy depends importantly

on the evolution of real activity and inflation over

time. If economic conditions evolve in an unexpected

manner, then assessments of the appropriate setting

of the federal funds rate would change from that

point forward.

Minutes of Federal Open Market Committee Meetings | June 209

Meeting Held on July 29–30, 2014

A meeting of the Federal Open Market Committee

was held in the offices of the Board of Governors of

the Federal Reserve System in Washington, D.C., on

Tuesday, July 29, 2014, at 10:00 a.m. and continued

on Wednesday, July 30, 2014, at 9:00 a.m.

Present

Janet L. Yellen

Chair

William C. Dudley

Vice Chairman

Lael Brainard

Stanley Fischer

Richard W. Fisher

Narayana Kocherlakota

Loretta J. Mester

Charles I. Plosser

Jerome H. Powell

Daniel K. Tarullo

Charles L. Evans, Jeffrey M. Lacker,

Dennis P. Lockhart, and John C. Williams

Alternate Members of the Federal Open Market

Committee

James Bullard, Esther L. George,

and Eric Rosengren

Presidents of the Federal Reserve Banks of St. Louis,

Kansas City, and Boston, respectively

William B. English

Secretary and Economist

Matthew M. Luecke

Deputy Secretary

Michelle A. Smith

Assistant Secretary

Scott G. Alvarez

General Counsel

Thomas C. Baxter

Deputy General Counsel

Steven B. Kamin

Economist

David W. Wilcox

Economist

James A. Clouse, Thomas A. Connors,

Evan F. Koenig, Thomas Laubach,

Michael P. Leahy, Paolo A. Pesenti,

Mark E. Schweitzer, and William Wascher

Associate Economists

Simon Potter

Manager, System Open Market Account

Lorie K. Logan

Deputy Manager, System Open Market Account

Robert deV. Frierson

Secretary of the Board, Office of the Secretary,

Board of Governors

Nellie Liang

Director, Office of Financial Stability Policy and

Research, Board of Governors

Matthew J. Eichner

Deputy Director, Division of Research and Statistics,

Board of Governors

Maryann F. Hunter

Deputy Director, Division of Banking Supervision

and Regulation, Board of Governors

Stephen A. Meyer and William R. Nelson

Deputy Directors, Division of Monetary Affairs,

Board of Governors

Jon W. Faust and Stacey Tevlin

Special Advisers to the Board, Office of Board

Members, Board of Governors

Trevor A. Reeve

Special Adviser to the Chair, Office of Board

Members, Board of Governors

Linda Robertson

Assistant to the Board, Office of Board Members,

Board of Governors

Ellen E. Meade and Joyce K. Zickler

Senior Advisers, Division of Monetary Affairs,

Board of Governors

David Bowman

Associate Director, Division of International Finance,

Board of Governors

David E. Lebow

and Michael G. Palumbo

Associate Directors, Division of Research and

Statistics, Board of Governors

Attended the joint session of the Federal Open Market Com-

mittee and the Board of Governors.

Attended the portion of the meeting following the joint session

of the Federal Open Market Committee and the Board of

Governors.

210 101st Annual Report | 2014

Fabio M. Natalucci

and Gretchen C. Weinbach

Associate Directors, Division of Monetary Affairs,

Board of Governors

Jane E. Ihrig

Deputy Associate Director, Division of Monetary

Affairs, Board of Governors

Eric C. Engstrom, Patrick E. McCabe,

and Karen M. Pence

Advisers, Division of Research and Statistics,

Board of Governors

Penelope A. Beattie

Assistant to the Secretary, Office of the Secretary,

Board of Governors

Francisco Covas and Elizabeth Klee

Section Chiefs, Division of Monetary Affairs,

Board of Governors

David H. Small

Project Manager, Division of Monetary Affairs,

Board of Governors

Katie Ross

Manager, Office of the Secretary,

Board of Governors

Elmar Mertens

Senior Economist, Division of Monetary Affairs,

Board of Governors

Peter M. Garavuso

Records Project Manager, Division of Monetary

Affairs, Board of Governors

Gregory L. Stefani

First Vice President, Federal Reserve Bank of

Cleveland

David Altig, Ron Feldman,

Jeff Fuhrer, and Daniel G. Sullivan

Executive Vice Presidents, Federal Reserve Banks of

Atlanta, Minneapolis, Boston, and Chicago,

respectively

Michael Dotsey and Meg McConnell

Senior Vice Presidents, Federal Reserve Banks of

Philadelphia and New York, respectively

Fred Furlong

Group Vice President, Federal Reserve Bank of

San Francisco

Antoine Martin,

Douglas Tillett,

David C. Wheelock, Jonathan L. Willis,

and Patricia Zoebel

Vice Presidents, Federal Reserve Banks of New York,

Chicago, St. Louis, Kansas City, and New York,

respectively

Robert L. Hetzel

Senior Economist, Federal Reserve Bank of

Richmond

During the interval between the June and July meet-

ings, Chair Yellen appointed a subcommittee on

communications issues chaired by Governor Fischer

and including President Mester, Governor Powell,

and President Williams. Governor Fischer indicated

that the subcommittee would continue the work of

previous subcommittees in helping the Committee

frame and organize the discussion of a broad range

of communications issues.

Developments in Financial Markets and

the Federal Reserve’s Balance Sheet

In a joint session of the Federal Open Market Com-

mittee (FOMC) and the Board of Governors of the

Federal Reserve System, the manager of the System

Open Market Account (SOMA) reported on devel-

opments in domestic and foreign financial markets.

The manager also reported on the System open mar-

ket operations conducted during the period since the

Committee met on June 17–18, 2014, summarized

the outcomes of recent test operations of the Term

Deposit Facility (TDF), described the results from

the fixed-rate overnight reverse repurchase agreement

(ON RRP) operational exercise, and reviewed the

ongoing effects of recent foreign central bank policy

actions on yields on the international portion of the

SOMA portfolio. In addition, the manager noted

plans for a pilot program for increasing the number

of the Open Market Desk’s counterparties for agency

mortgage-backed securities (MBS) operations to

include a few firms that are too small to qualify as

primary dealers. By unanimous vote, the Committee

ratified the Desk’s domestic transactions over the

intermeeting period. There were no intervention

operations in foreign currencies for the System’s

account over the intermeeting period.

Monetary Policy Normalization

Meeting participants continued their discussion of

issues associated with the eventual normalization of

the stance and conduct of monetary policy, consis-

tent with the Committee’s intention to provide addi-

tional information to the public later this year, well

before most participants anticipate the first steps in

reducing policy accommodation to become appropri-

ate. The staff detailed a possible approach for imple-

menting and communicating monetary policy once

the Committee begins to tighten the stance of policy.

Minutes of Federal Open Market Committee Meetings | July 211

The approach reflected the Committee’s discussion

of normalization strategies and policy tools during

the previous two meetings.

Participants expressed general support for the nor-

malization approach outlined by the staff, though

some noted reservations about one or more of its fea-

tures. Almost all participants agreed that it would be

appropriate to retain the federal funds rate as the key

policy rate, and they supported continuing to target a

range of 25 basis points for this rate at the time of

liftoff and for some time thereafter. However, one

participant preferred to use the range for the federal

funds rate as a communication tool rather than as a

hard target, and another preferred that policy com-

munications during the normalization period focus

on the rate of interest on excess reserves (IOER) and

the ON RRP rate in addition to the federal funds

rate. Participants agreed that adjustments in the

IOER rate would be the primary tool used to move

the federal funds rate into its target range and influ-

ence other money market rates. In addition, most

thought that temporary use of a limited-scale ON

RRP facility would help set a firmer floor under

money market interest rates during normalization.

Most participants anticipated that, at least initially,

the IOER rate would be set at the top of the target

range for the federal funds rate, and the ON RRP

rate would be set at the bottom of the federal funds

target range. Alternatively, some participants sug-

gested the ON RRP rate could be set below the bot-

tom of the federal funds target range, judging that it

might be possible to begin the normalization process

with minimal or no reliance on an ON RRP facility

and increase its role only if necessary. However, many

other participants thought that such a strategy might

result in insufficient control of money market rates at

liftoff, which could cause confusion about the likely

path of monetary policy or raise questions about the

Committee’s ability to implement policy effectively.

Participants generally agreed that the ON RRP facil-

ity should be only as large as needed for effective

monetary policy implementation and should be

phased out when it is no longer needed for that pur-

pose. Participants expressed their desire to include

features in the facility’s design that would limit the

Federal Reserve’s role in financial intermediation and

mitigate the risk that the facility might magnify

strains in short-term funding markets during periods

of financial stress. They discussed options to address

these concerns, including methods for limiting the

program’s size. Many participants noted that further

testing would provide additional information that

could help determine the appropriate features to tem-

per the risks that might be associated with an ON

RRP facility.

Participants also discussed approaches to normaliz-

ing the size and composition of the Federal Reserve’s

balance sheet. In general, they agreed that the size of

the balance sheet should be reduced gradually and

predictably. In addition, they believed that, in the

long run, the balance sheet should be reduced to the

smallest level consistent with efficient implementa-

tion of monetary policy and should consist primarily

of Treasury securities in order to minimize the effect

of the SOMA portfolio on the allocation of credit

across sectors of the economy. A few participants

noted that the appropriate size of the balance sheet

would depend on the Committee’s future decisions

regarding its framework for monetary policy. Most

participants supported reducing or ending reinvest-

ment sometime after the first increase in the target

range for the federal funds rate. A few, however,

believed that ceasing reinvestment before liftoff was a

better approach because it would lead to an earlier

reduction in the size of the portfolio. Most partici-

pants continued to anticipate that the Committee

would not sell MBS, except perhaps to eliminate

residual holdings. However, a couple of participants

preferred to sell MBS in order to unwind the effect of

the Federal Reserve’s holdings on mortgage rates

relative to other interest rates more rapidly than

would occur as a result of repayments of principal

alone. Some others noted that, given the uncertainties

attending the normalization process and the outlook

for the economy and financial markets, it could be

helpful to retain the option to sell some assets.

Participants agreed that the Committee should pro-

vide additional information to the public regarding

the details of normalization well before most partici-

pants anticipate the first steps in reducing policy

accommodation to become appropriate. They

stressed the importance of communicating a clear

plan while at the same time noting the importance of

maintaining flexibility so that adjustments to the nor-

malization approach could be made as the situation

changed and in light of experience. Participants

requested additional analysis from the staff on issues

related to normalization as background for further

discussion at their next meeting. A few participants

also suggested that the Committee should solicit

additional information from the public regarding the

possible effects of an ON RRP facility, but some oth-

ers pointed out that the Committee would continue

to receive such feedback informally in response to its

212 101st Annual Report | 2014

ongoing communications regarding normalization.

The Board meeting concluded at the end of the dis-

cussion of approaches to policy normalization.

Staff Review of the Economic Situation

The information reviewed for the July 29–30 meeting

indicated that real gross domestic product (GDP)

rebounded in the second quarter following its first-

quarter decline, but it expanded at only a modest pace,

on balance, over the first half of the year. Consumer

price inflation rose somewhat in the second quarter,

but futures prices for energy and agricultural com-

modities generally were trending down over the next

couple of years and longer-run measures of inflation

expectations remained stable. The Bureau of Eco-

nomic Analysis (BEA) released its advance estimate for

second-quarter real GDP, along with revised data for

earlier periods, on the second day of the FOMC meet-

ing. The staff’s assessment of economic activity and

inflation in the first half of 2014, based on information

available before the meeting began, was broadly consis-

tent with the new information from the BEA.

Measures of labor market conditions generally con-

tinued to improve during the intermeeting period.

Total nonfarm payroll employment increased

strongly in June, and the average monthly gain for

the second quarter was the largest since the first

quarter of 2012. The unemployment rate declined to

6.1 percent in June, the labor force participation rate

was unchanged, and the employment-to-population

ratio edged up. The rate of long-duration unemploy-

ment moved down, and the share of workers

employed part time for economic reasons edged up;

both measures remained elevated by historical stan-

dards. Initial claims for unemployment insurance

declined further in recent weeks. The rate of job

openings rose further in May, but the rate of hiring

was unchanged and remained at a modest level.

Industrial production increased in the second quar-

ter, as higher output from manufacturers and mines

more than offset a decline in the output of electric

and natural gas utilities. Capacity utilization also

moved higher in the second quarter. Automakers’

production schedules indicated that light motor

vehicle assemblies would increase in the third quarter,

and readings on new orders from national and

regional manufacturing surveys were consistent with

moderate gains in factory output in the near term.

Real personal consumption expenditures (PCE) rose

more quickly in the second quarter than in the first,

partly reflecting higher purchases of light motor

vehicles. Key factors that tend to influence household

spending remained positive in recent months. In par-

ticular, gains in equity values and home prices

boosted household net worth, and real disposable

personal income continued to rise in the second quar-

ter. Consumer sentiment in the Thomson Reuters/

University of Michigan Surveys of Consumers edged

down in early July but was only slightly below its

average over the first half of the year.

Real expenditures for residential investment turned

up in the second quarter after declining for two con-

secutive quarters. Starts of new single-family houses

declined in June, but they rose for the quarter as a

whole, and the level of permit issuance was consis-

tent with increases in starts in subsequent months. In

the multifamily sector, starts and permits also

increased, on net, in the second quarter. Existing

home sales moved up during the second quarter but

remained below year-earlier levels, while new home

sales declined. Home prices continued to rise through

May, though the rate of increase was less rapid than

earlier in the year.

Real private expenditures for business equipment and

intellectual property products increased in the second

quarter. Nominal new orders for nondefense capital

goods were little changed, on net, in May and June;

however, the level of orders was above that for ship-

ments, pointing to increases in shipments in subse-

quent months. Other forward-looking indicators,

such as national and regional surveys of business

conditions, also generally suggested moderate

increases in business equipment spending in the near

term. Real business expenditures for nonresidential

construction also increased in the second quarter.

Meanwhile, business inventories generally appeared

well aligned with sales, apart from the energy sector,

where inventories remained below year-earlier levels.

Real federal government purchases decreased over

the first half of the year, reflecting ongoing fiscal

consolidation and continued declines in defense

spending. In contrast, real state and local government

purchases increased in the second quarter, as payrolls

expanded at a faster pace than in the first quarter

and outlays for construction moved higher.

The U.S. international trade deficit narrowed in May

as imports fell and exports rose. The rise in exports

was concentrated in petroleum products and auto-

motive parts. The fall in imports was led by declines

in oil and consumer goods. For the second quarter

Minutes of Federal Open Market Committee Meetings | July 213

overall, net exports exerted a moderate drag on the

change in U.S. real GDP, compared with a more sub-

stantial negative contribution in the first quarter.

U.S. consumer prices, as measured by the PCE price

index, increased at a faster pace in the second quarter

than in the first and were about 1½ percent higher

than a year earlier. Consumer energy price inflation

rose in the second quarter, but retail gasoline prices,

measured on a seasonally adjusted basis, subse-

quently moved lower through the fourth week of

July. Consumer food price inflation also increased in

the second quarter, reflecting the effects of drought

and disease on crop and livestock production; how-

ever, spot prices for crops moved down in recent

weeks, and futures prices pointed to lower prices for

livestock in the year ahead. The PCE price index for

items excluding food and energy also rose more

quickly in the second quarter than in the first and

was 1½ percent higher than a year earlier. Near-term

inflation expectations from the Michigan survey were

little changed, on net, in June and early July, while

longer-term expectations declined. Measures of labor

compensation indicated that gains in nominal wages

and employee benefits remained modest.

Recent indicators suggested that foreign economic

activity strengthened in the second quarter: Chinese

GDP accelerated substantially, and Mexican data sug-

gested a pickup there. Real GDP growth remained

strong in the United Kingdom, and data for both

Canada and the euro area showed improvement rela-

tive to the first quarter. By contrast, household spend-

ing in Japan dropped sharply following the country’s

April 1 consumption tax increase. In many advanced

foreign economies, inflation picked up in the second

quarter from very low rates in the first, although

second-quarter inflation in the euro area remained well

below the European Central Bank’s objective.

Staff Review of the Financial Situation

Financial conditions eased somewhat, on balance,

between the June and July FOMC meetings,

although geopolitical risks weighed on investor senti-

ment at times. On net, yields on longer-term Treasury

securities fell, equity prices rose, and the foreign

exchange value of the dollar was little changed.

Market participants characterized the Federal

Reserve’s monetary policy communications over the

intermeeting period as suggesting a slightly more

accommodative policy stance than had been

expected. The anticipated path of the federal funds

rate shifted down modestly following the June

FOMC statement and the Chair’s press conference.

Policy expectations also edged down on the release of

the minutes of the June FOMC meeting. Market par-

ticipants took note of the discussion of monetary

policy normalization in the minutes and, particularly,

the discussion of the likely spread between the ON

RRP rate and the IOER rate.

Results from the Desk’s July Survey of Primary

Dealers, conducted shortly before the July FOMC

meeting, indicated that market participants’ expecta-

tions for the timing of the first increase in the federal

funds rate and the subsequent policy path were

largely unchanged from those reported in the survey

taken just before the June meeting. The median

dealer continued to see the third quarter of 2015 as

the most likely time for the liftoff of the federal funds

rate from the effective lower bound, although, rela-

tive to the June survey, the distribution of the modal

expected time of liftoff became more concentrated

around the third quarter of 2015.

On balance, 10- and 30-year nominal Treasury yields

both declined about 20 basis points over the inter-

meeting period. Concerns about tensions in Ukraine

and the Middle East and the release of the June min-

utes appeared to contribute to the declines in longer-

term Treasury yields. The decline in yields at the long

end of the curve likely also reflected a continuation

of a pattern that began last year, which some market

participants attributed to a reduction in investors’

expectations for longer-run economic growth and

declines in term premiums. Measures of longer-

horizon inflation compensation based on Treasury

Inflation-Protected Securities were about unchanged.

Conditions in unsecured short-term dollar funding

markets remained stable over the intermeeting

period. The Federal Reserve continued its ON RRP

exercise and TDF testing. As a result of somewhat

higher market rates on repurchase agreements, ON

RRP take-up, on average, was a little lower than in

the prior intermeeting period, although participation

in the ON RRP exercise jumped to a record high at

quarter-end on June 30. Moreover, the ON RRP

exercise appeared to have continued to help firm the

floor under money market interest rates. In TDF

testing that ran from mid-May to early July, gradual

increases in offer rates and in the maximum indi-

vidual award amounts generally resulted in higher

participation.

214 101st Annual Report | 2014

The S&P 500 index rose about 1½ percent over the

intermeeting period, as earnings reports from a range

of companies appeared to indicate that profits in the

second quarter had increased modestly relative to the

first quarter. The VIX, an index of option-implied

volatility for one-month returns on the S&P 500

index, remained at low levels over the intermeeting

period.

Credit flows to nonfinancial corporations remained

strong in the second quarter. Gross issuance of

investment- and speculative-grade bonds stayed

brisk. Commercial and industrial loans on banks’

balance sheets continued to increase at a robust pace,

consistent with reports in the July Senior Loan Offi-

cer Opinion Survey on Bank Lending Practices

(SLOOS) of easier lending standards and terms as

well as stronger loan demand from firms of all sizes.

Issuance of leveraged loans by institutional investors

also remained solid.

Credit conditions in markets for commercial real

estate (CRE) improved further in the second quarter.

According to the July SLOOS, banks continued to

ease their standards and report stronger demand for

CRE loans during the second quarter on balance.

CRE loans on banks’ books continued to expand

moderately, and issuance of commercial mortgage-

backed securities remained solid.

Credit conditions in residential mortgage markets gen-

erally remained tight over the intermeeting period.

Mortgage interest rates held steady around 4 percent,

and origination volumes continued to be low. Accord-

ing to the July SLOOS, underwriting standards on

prime home-purchase loans appeared to have eased

further at banks during the second quarter but, on net,

standards on all types of residential real estate loans

reportedly remained tighter than the midpoints of the

respondent banks’ longer-term ranges.

In contrast to mortgage lending, consumer credit

continued to expand robustly in May, largely on the

strength of auto and student loans, though credit

card debt picked up somewhat as well. Banks

responding to the July SLOOS indicated that

demand for auto loans strengthened further in the

second quarter. In addition, demand for credit card

loans increased, and a few large banks reported hav-

ing eased lending policies for such loans.

Benchmark yields on long-term sovereign bonds in

the advanced foreign economies continued the down-

ward trend that began at the start of the year, with

rising tensions in the Middle East and Ukraine dur-

ing the intermeeting period likely adding some to the

downward pressure. Concerns about one of Portu-

gal’s largest banks and about litigation risks facing

European banks weighed on European financial mar-

kets, prompting yield spreads on peripheral sovereign

bonds in the euro area to widen and equity price

indexes for European banks to decline. Intermeeting

data releases on euro-area industrial production came

in below market expectations, also weighing on head-

line equity markets in the region. Mixed news from

emerging market economies, including better-than-

expected GDP growth in China and concerns about

Argentina’s scheduled debt payments, generally had

modest market effects. Changes in emerging market

equity indexes were mixed over the period, and

emerging market bond yields generally declined. The

broad trade-weighted dollar was little changed, on

net, over the intermeeting period.

The staff’s periodic report on potential risks to finan-

cial stability concluded that relatively strong capital

positions of U.S. banks, subdued use of maturity

transformation and leverage within the broader

financial sector, and relatively low levels of leverage

for the aggregate nonfinancial sector were important

factors supporting overall financial stability. How-

ever, the staff report also highlighted that low and

declining risk premiums, low levels of market volatil-

ity, and a loosening of underwriting standards in a

number of markets raised somewhat the risk of an

eventual correction in asset valuations.

Staff Economic Outlook

The data received since the staff prepared its forecast

for the June FOMC meeting suggested that real GDP

growth was even weaker in the first half of the year

than had been anticipated.

However, the staff left its

forecast for real GDP growth in the second half of

the year essentially unrevised because other indica-

tors of economic activity appeared comparatively

strong in relation to real GDP during the first half of

the year. In particular, payroll employment continued

to advance at a solid pace, the unemployment rate

declined further, industrial production posted steady

gains, and readings from business surveys were

strong. The staff’s medium-term forecast for real

GDP growth was also little revised. The staff contin-

ued to project that real GDP would expand at a

faster pace in the second half of this year and over

The staff’s forecast for the July FOMC meeting was prepared

prior to the July 30 release of the BEA’s advance estimate of

real GDP in the second quarter and revisions for earlier periods.

Minutes of Federal Open Market Committee Meetings | July 215

the next two years than in 2013. This forecast was

predicated on a further anticipated waning of the

restraint on spending growth from changes in fiscal

policy, continued improvement in credit availability,

increases in consumer and business confidence, and a

pickup in foreign economic growth. In response to a

further downward surprise in the unemployment rate,

the staff again lowered its forecast for the unemploy-

ment rate over the projection period. To reconcile the

downward revision to real GDP growth for the first

half of year with an unemployment rate that was

now closer to the staff’s estimate of its longer-run

natural rate, the staff lowered its assumed pace of

potential output growth this year by more than it

marked down GDP growth. As a result, resource

slack in this projection was anticipated to be some-

what narrower this year than in the previous forecast

and to be taken up slowly over the projection period.

The staff’s near-term forecast for inflation was

revised up a little, as recent data showed somewhat

faster-than-anticipated increases that were judged to

be only partly transitory. With a little less resource

slack in this projection, the medium-term forecast for

inflation was also revised up slightly. Nonetheless, as

in the June projection, inflation was projected to step

down in the second half of this year and to remain

below the Committee’s longer-run objective of 2 per-

cent over the next few years. With longer-run infla-

tion expectations assumed to remain stable, changes

in commodity and import prices expected to be sub-

dued, and slack in labor and product markets antici-

pated to diminish only slowly, inflation was forecast

to rise gradually and to reach the Committee’s objec-

tive in the longer run.

The staff continued to view uncertainty around its

projections for real GDP growth, inflation, and the

unemployment rate as roughly in line with the aver-

age of the past 20 years. Although the risks to GDP

growth were still seen as tilted a little to the down-

side, as neither monetary policy nor fiscal policy was

viewed as well positioned to help the economy with-

stand adverse shocks, these risks were considered to

be more nearly balanced than in the previous projec-

tion. The staff continued to view the risks around its

outlook for the unemployment rate and for inflation

as roughly balanced.

Participants’ Views on Current Conditions

and the Economic Outlook

In their discussion of the economic situation and the

outlook, meeting participants generally viewed the

rebound in real GDP in the second quarter and the

ongoing improvement in labor market conditions as

supporting their expectations for continued moderate

economic expansion with labor market indicators

and inflation moving toward levels the Committee

judges consistent with its dual mandate. Although

most participants continued to view the risks to the

outlook for economic activity and the labor market

as nearly balanced, some pointed to possible sources

of downside risk, including persistent weakness in

the housing sector, a continued slow rise in house-

hold income, or spillovers from developments in the

Middle East and Ukraine. Participants noted that

inflation had moved somewhat closer to the Commit-

tee’s 2 percent longer-run objective and generally saw

the risks of inflation running persistently below their

objective as having diminished somewhat.

Household spending appeared to be rising moder-

ately and was expected to contribute to stronger eco-

nomic growth in the second half of the year than in

the first half. Business contacts in several Districts

reported a pickup in consumer spending after the

weakness in the first quarter. However, a few partici-

pants raised concerns that households might remain

cautious, with the personal saving rate staying

elevated, or that the slow rise in wages and income

might be insufficient to support stronger consumer

spending.

The recovery in housing activity remained slow

according to most participants. Although mortgage

rates were still low and housing appeared to be rela-

tively affordable, various factors were seen as

restraining demand, including low expected income

and high levels of student debt as well as difficulty in

obtaining mortgage credit, particularly for younger,

first-time homebuyers. It was also noted that the

weakness in homebuilding along with the continued

rise in house prices suggested that supply constraints

were also weighing on construction activity. A couple

of participants indicated that some demand appeared

to have shifted to rental properties. The rising

demand for rentals was in part being satisfied by

investors buying homes for the rental market; it was

also providing support for multifamily construction.

Some participants noted their concern that a number

of the factors restraining residential construction

might persist, damping the housing recovery for

some time.

Many participants reported continued improvement

in sentiment among their business contacts and

noted positive readings from recent regional and

216 101st Annual Report | 2014

national surveys of manufacturing and service-sector

activity. In particular, participants cited strength in

airlines, railroads, trucking firms, businesses supply-

ing the motor vehicle and aerospace industries, and

those in the high-tech sector. In addition, higher

energy prices continued to provide support for activ-

ity in the energy sector. In the agriculture sector,

favorable growing conditions for crops had lowered

prices but increased the profitability of livestock pro-

ducers. The reports from their business contacts pro-

vided support for participants’ expectation of

stronger economic growth in the second half of the

year. In some cases, the information from businesses

suggested increases in spending on capital equipment

or a pickup in investment in commercial and indus-

trial construction and transportation. Contacts in a

number of areas indicated that credit was readily

available, and reports from participants’ business and

financial contacts indicated a strengthening in

demand for bank credit. However, several partici-

pants reported that businesses remained somewhat

uncertain about the economic outlook and thus were

still cautious about stepping up capital spending and

hiring. Federal fiscal restraint reportedly continued

to depress business activity in some areas dependent

on federal spending.

Labor market conditions improved in recent months

according to participants’ reports on developments in

their Districts as well as a range of national indica-

tors. The improvement was reflected not only in a

pickup in payroll employment gains and a noticeable

decline in the overall unemployment rate, but also in

reductions in broader measures of underutilization

such as long-duration joblessness and the number of

workers with part-time jobs who would prefer full-

time employment. The labor force participation rate

was stable, and a couple of participants pointed out

that the transition rate from long-duration unem-

ployment to employment had moved up. Moreover,

some participants cited positive signs of increased

hiring and turnover in the labor market, including

increases in job openings and hiring plans, higher

quit rates, and apparent improvements in matching

workers and jobs.

Participants generally agreed that both the recent

improvement in labor market conditions and the

cumulative progress over the past year had been

greater than anticipated and that labor market condi-

tions had moved noticeably closer to those viewed as

normal in the longer run. Participants differed, how-

ever, in their assessments of the remaining degree of

labor market slack and how to measure it. A few

argued that the unemployment rate continues to

serve as a reliable summary statistic for the overall

state of the labor market and thought that it should

be the Committee’s principal focus for evaluating

labor market conditions. However, many participants

continued to see a larger gap between current labor

market conditions and those consistent with their

assessments of normal levels of labor utilization than

indicated by the difference between the unemploy-

ment rate and estimates of its longer-run normal

level. These participants cited, for example, the still-

elevated levels of long-term unemployment and

workers employed part time for economic reasons as

well as low labor force participation. Several partici-

pants pointed out that the recent drop in the unem-

ployment rate had been associated with progress in

reabsorbing the long-term unemployed into jobs and

reducing part-time work, suggesting that slack was

diminishing and could be reduced further as employ-

ment opportunities expanded.

Labor compensation was still rising only modestly.

Many participants continued to attribute the sub-

dued rise in wages to the remaining slack in the labor

market; it was noted that the elevated level of rela-

tively low-paid part-time workers was holding down

overall wage increases. Several other participants

pointed to reports that wage pressures had increased

in some regions and occupations that were experienc-

ing labor shortages or relatively low unemployment.

However, a couple of participants indicated that the

pass-through of labor costs has been more attenuated

since the mid-1980s and that wage pressures might

not be a reliable leading indicator of higher inflation.

Inflation firmed in recent months, and most partici-

pants anticipated that it would continue to move up

toward the Committee’s 2 percent objective. Many of

them expected that inflation was likely to rise gradu-

ally over the medium term, as resource slack dimin-

ished and inflation expectations remained stable. In

support of their assessments, several reported results

from various statistical models of inflation and infla-

tion expectations. Most now judged that the down-

side risks to inflation had diminished, but a few par-

ticipants continued to see inflation as likely to persist

below the Committee’s objective over the medium

term. Several commented that the upside risks had

not increased. However, a few others argued that the

recent tightening of the labor market had increased

the upside risks to inflation and inflation expecta-

tions, particularly in an environment in which the

economic expansion was expected to strengthen

further.

Minutes of Federal Open Market Committee Meetings | July 217

In their discussion of financial stability issues, par-

ticipants noted evidence of valuation pressures in

some particular asset markets, but those pressures

did not appear to be widespread and other measures

of vulnerability in the financial system were at low to

moderate levels. As a result, they generally saw the

vulnerabilities in the financial system as well con-

tained. Some participants discussed how the Com-

mittee might better incorporate f inancial stability

risks in its discussion of macroeconomic risks. They

also suggested that the Committee consider how

promptly various financial stability concerns could

be addressed, if need be, and which tools, including

monetary policy and regulatory responses, would be

most timely and effective in doing so.

With respect to monetary policy over the medium

run, participants generally agreed that labor market

conditions and inflation had moved closer to the

Committee’s longer-run objectives in recent months,

and most anticipated that progress toward those

goals would continue. Moreover, many participants

noted that if convergence toward the Committee’s

objectives occurred more quickly than expected, it

might become appropriate to begin removing mon-

etary policy accommodation sooner than they cur-

rently anticipated. Indeed, some participants viewed

the actual and expected progress toward the Commit-

tee’s goals as sufficient to call for a relatively prompt

move toward reducing policy accommodation to

avoid overshooting the Committee’s unemployment

and inflation objectives over the medium term. These

participants were increasingly uncomfortable with

the Committee’s forward guidance. In their view, the

guidance suggested a later initial increase in the tar-

get federal funds rate as well as lower future levels of

the funds rate than they judged likely to be appropri-

ate. They suggested that the guidance should more

clearly communicate how policy-setting would

respond to the evolution of economic data. However,

most participants indicated that any change in their

expectations for the appropriate timing of the first

increase in the federal funds rate would depend on

further information on the trajectories of economic

activity, the labor market, and inflation. In particular,

although participants generally saw the drop in real

GDP in the first quarter as transitory, some noted

that it increased uncertainty about the outlook, and

they were looking to additional data on production,

spending, and labor market developments to shed

light on the underlying pace of economic growth.

Moreover, despite recent inflation developments, sev-

eral participants continued to believe that inflation

was likely to move back to the Committee’s objective

very slowly, thereby warranting a continuation of

highly accommodative policy as long as projected

inflation remained below 2 percent and longer-term

inflation expectations were well anchored.

Committee Policy Action

In their discussion of monetary policy in the period

ahead, members judged that information received

since the Federal Open Market Committee met in

June indicated that economic activity rebounded in

the second quarter. Household spending appeared to

be rising moderately, and business fixed investment

was advancing, while the recovery in the housing sec-

tor remained slow. Fiscal policy was restraining eco-

nomic growth, although the extent of the restraint

was diminishing. The Committee expected that, with

appropriate policy accommodation, economic activ-

ity would expand at a moderate pace with labor mar-

ket indicators and inflation moving toward levels that

the Committee judges consistent with its dual

mandate.

With the incoming information broadly supporting

the Committee’s expectation of ongoing improve-

ment in labor market conditions and inflation mov-

ing back to the Committee’s 2 percent objective,

members generally agreed that a further measured

reduction in the pace of asset purchases was appro-

priate at this meeting. Accordingly, the Committee

agreed that, beginning in August, it would add to its

holdings of agency MBS at a pace of $10 billion per

month rather than $15 billion per month, and it

would add to its holdings of Treasury securities at a

pace of $15 billion per month rather than $20 billion

per month. The Committee again judged that, if

incoming data broadly supported its expectations

that labor market indicators and inflation would con-

tinue to move toward mandate-consistent levels, the

Committee would likely reduce the pace of asset pur-

chases in further measured steps at future meetings.

However, the Committee reiterated that asset pur-

chases were not on a preset course and that its deci-

sions remained contingent on the outlook for the

labor market and inflation as well as its assessment of

the likely efficacy and costs of such purchases.

Members discussed their assessments of progress—

both realized and expected—toward the Committee’s

objectives of maximum employment and 2 percent

inflation and considered enhancements to the state-

ment language that would more clearly communicate

the Committee’s view on such progress. Regarding

the labor market, many members concluded that a

218 101st Annual Report | 2014

range of indicators of labor market conditions—in-

cluding the unemployment rate as well as a number

of other measures of labor utilization—had

improved more in recent months than they antici-

pated earlier. They judged it appropriate to replace

the description of recent labor market conditions

that mentioned solely the unemployment rate with a

description of their assessment of the remaining

underutilization of labor resources based on their

evaluation of a range of labor market indicators. In

their discussion, some members expressed reserva-

tions about describing the extent of underutilization

in labor resources more broadly. In particular, they

worried that the degree of labor market slack was

difficult to characterize succinctly and that the state-

ment language might prove difficult to adjust as

labor market conditions continued to improve. More-

over, they were concerned that, despite the improve-

ment in labor market conditions, the new language

might be misinterpreted as indicating increased con-

cern about underutilization of labor resources. At the

conclusion of the discussion, the Committee agreed

to state that labor market conditions had improved,

with the unemployment rate declining further, while

also stating that a range of labor market indicators

suggested that there remained significant underuti-

lization of labor resources. Many members noted,

however, that the characterization of labor market

underutilization might have to change before long,

particularly if progress in the labor market continued

to be faster than anticipated. Regarding inflation,

members agreed to update the language in the state-

ment to acknowledge that inflation had recently

moved somewhat closer to the Committee’s longer-

run objective and to convey their judgment that the

likelihood of inflation running persistently below

2 percent had diminished somewhat.

After the discussion, all members but one voted to

maintain the Committee’s target range for the federal

funds rate and to reiterate its forward guidance on how

it would assess the appropriate timing of the first

increase in the target rate and the anticipated behavior

of the federal funds rate after it is raised. One member,

however, objected to the guidance that it would likely

be appropriate to maintain the current range for the

federal funds rate for a considerable time after the asset

purchase program ends because it was time dependent

and did not recognize the implications for monetary

policy of the considerable progress that had been made

toward the Committee’s goals.

At the conclusion of the discussion, the Committee

voted to authorize and direct the Federal Reserve

Bank of New York, until it was instructed otherwise,

to execute transactions in the SOMA in accordance

with the following domestic policy directive:

“Consistent with its statutory mandate, the Fed-

eral Open Market Committee seeks monetary

and financial conditions that will foster maxi-

mum employment and price stability. In particu-

lar, the Committee seeks conditions in reserve

markets consistent with federal funds trading in

a range from 0 to ¼ percent. The Committee

directs the Desk to undertake open market

operations as necessary to maintain such condi-

tions. Beginning in August, the Desk is directed

to purchase longer-term Treasury securities at a

pace of about $15 billion per month and to pur-

chase agency mortgage-backed securities at a

pace of about $10 billion per month. The Com-

mittee also directs the Desk to engage in dollar

roll and coupon swap transactions as necessary

to facilitate settlement of the Federal Reserve’s

agency mortgage-backed securities transactions.

The Committee directs the Desk to maintain its

policy of rolling over maturing Treasury securi-

ties into new issues and its policy of reinvesting

principal payments on all agency debt and

agency mortgage-backed securities in agency

mortgage-backed securities. The System Open

Market Account manager and the secretary will

keep the Committee informed of ongoing devel-

opments regarding the System’s balance sheet

that could affect the attainment over time of the

Committee’s objectives of maximum employ-

ment and price stability.”

The vote encompassed approval of the statement

below to be released at 2:00 p.m.:

“Information received since the Federal Open

Market Committee met in June indicates that

growth in economic activity rebounded in the

second quarter. Labor market conditions

improved, with the unemployment rate declining

further. However, a range of labor market indi-

cators suggests that there remains significant

underutilization of labor resources. Household

spending appears to be rising moderately and

business fixed investment is advancing, while the

recovery in the housing sector remains slow. Fis-

cal policy is restraining economic growth,

although the extent of restraint is diminishing.

Inflation has moved somewhat closer to the

Committee’s longer-run objective. Longer-term

inflation expectations have remained stable.

Minutes of Federal Open Market Committee Meetings | July 219

Consistent with its statutory mandate, the Com-

mittee seeks to foster maximum employment

and price stability. The Committee expects that,

with appropriate policy accommodation, eco-

nomic activity will expand at a moderate pace,

with labor market indicators and inflation mov-

ing toward levels the Committee judges consis-

tent with its dual mandate. The Committee sees

the risks to the outlook for economic activity

and the labor market as nearly balanced and

judges that the likelihood of inflation running

persistently below 2 percent has diminished

somewhat.

The Committee currently judges that there is

sufficient underlying strength in the broader

economy to support ongoing improvement in

labor market conditions. In light of the cumula-

tive progress toward maximum employment and

the improvement in the outlook for labor market

conditions since the inception of the current

asset purchase program, the Committee decided

to make a further measured reduction in the

pace of its asset purchases. Beginning in August,

the Committee will add to its holdings of agency

mortgage-backed securities at a pace of $10 bil-

lion per month rather than $15 billion per

month, and will add to its holdings of longer-

term Treasury securities at a pace of $15 billion

per month rather than $20 billion per month.

The Committee is maintaining its existing policy

of reinvesting principal payments from its hold-

ings of agency debt and agency mortgage-

backed securities in agency mortgage-backed

securities and of rolling over maturing Treasury

securities at auction. The Committee’s sizable

and still-increasing holdings of longer-term

securities should maintain downward pressure

on longer-term interest rates, support mortgage

markets, and help to make broader financial

conditions more accommodative, which in turn

should promote a stronger economic recovery

and help to ensure that inflation, over time, is at

the rate most consistent with the Committee’s

dual mandate.

The Committee will closely monitor incoming

information on economic and financial develop-

ments in coming months and will continue its

purchases of Treasury and agency mortgage-

backed securities, and employ its other policy

tools as appropriate, until the outlook for the

labor market has improved substantially in a

context of price stability. If incoming informa-

tion broadly supports the Committee’s expecta-

tion of ongoing improvement in labor market

conditions and inflation moving back toward its

longer-run objective, the Committee will likely

reduce the pace of asset purchases in further

measured steps at future meetings. However,

asset purchases are not on a preset course, and

the Committee’s decisions about their pace will

remain contingent on the Committee’s outlook

for the labor market and inflation as well as its

assessment of the likely efficacy and costs of

such purchases.

To support continued progress toward maxi-

mum employment and price stability, the Com-

mittee today reaffirmed its view that a highly

accommodative stance of monetary policy

remains appropriate. In determining how long to

maintain the current 0 to ¼ percent target range

for the federal funds rate, the Committee will

assess progress—both realized and expected—

toward its objectives of maximum employment

and 2 percent inflation. This assessment will take

into account a wide range of information,

including measures of labor market conditions,

indicators of inflation pressures and inflation

expectations, and readings on financial develop-

ments. The Committee continues to anticipate,

based on its assessment of these factors, that it

likely will be appropriate to maintain the current

target range for the federal funds rate for a con-

siderable time after the asset purchase program

ends, especially if projected inflation continues

to run below the Committee’s 2 percent longer-

run goal, and provided that longer-term infla-

tion expectations remain well anchored.

When the Committee decides to begin to remove

policy accommodation, it will take a balanced

approach consistent with its longer-run goals of

maximum employment and inflation of 2 per-

cent. The Committee currently anticipates that,

even after employment and inflation are near

mandate-consistent levels, economic conditions

may, for some time, warrant keeping the target

federal funds rate below levels the Committee

views as normal in the longer run.”

Voting for this action: Janet L. Yellen, William C.

Dudley, Lael Brainard, Stanley Fischer, Richard W.

Fisher, Narayana Kocherlakota, Loretta J. Mester,

Jerome H. Powell, and Daniel K. Tarullo.

Voting against this action: Charles I. Plosser.

220 101st Annual Report | 2014

Mr. Plosser dissented because he objected to the

statement’s guidance indicating that it likely will be

appropriate to maintain the current target range for

the federal funds rate for “a considerable time after

the asset purchase program ends.” In his view, the

reference to calendar time should be replaced with

language that indicates how monetary policy will

respond to incoming data. Moreover, he judged that

the statement did not acknowledge the substantial

progress that had been made toward the Committee’s

economic goals and thus risks unnecessary and dis-

ruptive volatility in financial markets, and perhaps in

the economy, if the Committee reduces accommoda-

tion sooner or more quickly than financial markets

anticipate.

It was agreed that the next meeting of the Committee

would be held on Tuesday–Wednesday, Septem-

ber 16–17, 2014. The meeting adjourned at 11:55

a.m. on July 30, 2014.

Notation Vote

By notation vote completed on July 8, 2014, the

Committee unanimously approved the minutes of the

Committee meeting held on June 17–18, 2014.

William B. English

Secretary

Minutes of Federal Open Market Committee Meetings | July 221

Meeting Held

on September 16–17, 2014

A meeting of the Federal Open Market Committee

was held in the offices of the Board of Governors of

the Federal Reserve System in Washington, D.C., on

Tuesday, September 16, 2014, at 11:00 a.m. and con-

tinued on Wednesday, September 17, 2014, at

9:00 a.m.

Present

Janet L. Yellen

Chair

William C. Dudley

Vice Chairman

Lael Brainard

Stanley Fischer

Richard W. Fisher

Narayana Kocherlakota

Loretta J. Mester

Charles I. Plosser

Jerome H. Powell

Daniel K. Tarullo

Christine Cumming, Charles L. Evans,

Jeffrey M. Lacker, Dennis P. Lockhart,

and John C. Williams

Alternate Members of the Federal Open Market

Committee

James Bullard, Esther L. George,

and Eric Rosengren

Presidents of the Federal Reserve Banks of St. Louis,

Kansas City, and Boston, respectively

William B. English

Secretary and Economist

Matthew M. Luecke

Deputy Secretary

Michelle A. Smith

Assistant Secretary

Scott G. Alvarez

General Counsel

Steven B. Kamin

Economist

David W. Wilcox

Economist

James A. Clouse, Evan F. Koenig,

Thomas Laubach, Michael P. Leahy,

Mark E. Schweitzer, and William Wascher

Associate Economists

Simon Potter

Manager, System Open Market Account

Lorie K. Logan

Deputy Manager, System Open Market Account

Robert deV. Frierson

Secretary of the Board, Office of the Secretary,

Board of Governors

Michael S. Gibson

Director, Division of Banking Supervision and

Regulation, Board of Governors

Matthew J. Eichner

Deputy Director, Division of Research and Statistics,

Board of Governors

Stephen A. Meyer and William R. Nelson

Deputy Directors, Division of Monetary Affairs,

Board of Governors

Mark E. Van Der Weide

Deputy Director, Division of Banking Supervision

and Regulation, Board of Governors

Andreas Lehnert

Deputy Director, Office of Financial Stability Policy

and Research, Board of Governors

Andrew Figura, David Reifschneider,

and Stacey Tevlin

Special Advisers to the Board, Office of Board

Members, Board of Governors

Trevor A. Reeve

Special Adviser to the Chair, Office of Board

Members, Board of Governors

Linda Robertson

Assistant to the Board, Office of Board Members,

Board of Governors

Christopher J. Erceg

Senior Associate Director, Division of International

Finance, Board of Governors

Attended the joint session of the Federal Open Market Com-

mittee and the Board of Governors.

Attended Wednesday’s session only.

Attended Tuesday’s session only.

222 101st Annual Report | 2014

Michael T. Kiley

and Jeremy B. Rudd

Senior Advisers, Division of Research and Statistics,

Board of Governors

Joyce K. Zickler

Senior Adviser, Division of Monetary Affairs,

Board of Governors

Eric M. Engen and Michael G. Palumbo

Associate Directors, Division of Research and

Statistics, Board of Governors

Fabio M. Natalucci

Associate Director, Division of Monetary Affairs,

Board of Governors

Marnie Gillis DeBoer

Deputy Associate Director, Division of Monetary

Affairs, Board of Governors

Joshua Gallin

Deputy Associate Director, Division of Research and

Statistics, Board of Governors

Edward Nelson

Assistant Director, Division of Monetary Affairs,

Board of Governors

Patrick E. McCabe

Adviser, Division of Research and Statistics,

Board of Governors

Penelope A. Beattie

Assistant to the Secretary, Office of the Secretary,

Board of Governors

David H. Small

Project Manager, Division of Monetary Affairs,

Board of Governors

Katie Ross

Manager, Office of the Secretary,

Board of Governors

Valerie Hinojosa

Records Project Manager, Division of Monetary

Affairs, Board of Governors

Marie Gooding

First Vice President, Federal Reserve Bank of Atlanta

David Altig, Alberto G. Musalem,

and Daniel G. Sullivan

Executive Vice Presidents, Federal Reserve Banks of

Atlanta, New York, and Chicago, respectively

Troy Davig, Michael Dotsey, Geoffrey Tootell,

Christopher J. Waller, and John A. Weinberg

Senior Vice Presidents, Federal Reserve Banks of

Kansas City, Philadelphia, Boston, St. Louis, and

Richmond, respectively

Sylvain Leduc, Jonathan P. McCarthy,

and Douglas Tillett

Vice Presidents, Federal Reserve Banks of

San Francisco, New York, and Chicago, respectively

Kei-Mu Yi

Special Policy Advisor to the President,

Federal Reserve Bank of Minneapolis

Developments in Financial Markets and

the Federal Reserve’s Balance Sheet

In a joint session of the Federal Open Market Com-

mittee (FOMC) and the Board of Governors of the

Federal Reserve System, the manager of the System

Open Market Account (SOMA) reported on devel-

opments in domestic and foreign financial markets

and reviewed the effects of recent foreign central

bank policy actions on yields on the international

portion of the SOMA portfolio. The deputy manager

reported on the System open market operations con-

ducted during the period since the Committee met on

July 29–30, 2014, summarized plans for additional

test operations of the Term Deposit Facility, and

described the results from the fixed-rate overnight

reverse repurchase agreement (ON RRP) operational

exercise.

The deputy manager also outlined a proposal for

changes to the ongoing ON RRP exercise to test pos-

sible design features that could allow an ON RRP

facility to serve as an effective supplementary tool

during policy normalization while also mitigating the

potential for unintended effects in financial markets.

Participants discussed the proposed changes in the

ON RRP exercise, including raising the

counterparty-specific limit from $10 billion to

$30 billion, limiting the overall size of each operation

to $300 billion, and introducing an auction process

that would be used to determine the interest rate on

such operations and allocate take-up if the sum of

bids exceeded the overall limit. Testing these design

features was generally seen as furthering the Commit-

tee’s understanding of how an ON RRP facility

might be structured to best balance its objectives of

supporting monetary control and of limiting the

Federal Reserve’s role in financial intermediation as

well as reducing potential financial stability risks the

facility might pose during periods of stress. Partici-

Attended the portion of the meeting following the joint session

of the Federal Open Market Committee and the Board of

Governors.

Minutes of Federal Open Market Committee Meetings | September 223

pants also discussed other tests that could be incor-

porated in the exercise at a later date, including a

daily time-varying cap along with the overall limit on

the size of ON RRP operations, small variations in

the offered rate on ON RRP operations, and moder-

ate increases and decreases in the overall size limit. A

number of participants expressed concern that these

tests could be misunderstood as providing a signal of

the Committee’s intentions regarding the parameters

of the ON RRP program that will be implemented

when normalization begins; they wanted to empha-

size that the tests are intended to provide additional

information to guide the Committee’s decisions. Par-

ticipants agreed to consider potential additional revi-

sions to the ON RRP exercise at future FOMC meet-

ings. Following the discussion, the Committee unani-

mously approved the following resolution:

“The Federal Open Market Committee (FOMC)

authorizes the Federal Reserve Bank of New

York to conduct a series of overnight reverse

repurchase operations involving U.S. govern-

ment securities for the purpose of further assess-

ing the appropriate structure of such operations

in supporting the implementation of monetary

policy during normalization. The reverse repur-

chase operations authorized by this resolution

shall be (i) conducted at an offering rate that

may vary from zero to five basis points, (ii) for

an overnight term, or such longer term as is war-

ranted to accommodate weekend, holiday, and

similar trading conventions, (iii) subject to a per-

counterparty limit of up to $30 billion per day,

(iv) subject to an overall size limit of up to

$300 billion per day, (v) awarded to all submit-

ters (A) at the specified offering rate if the sum

of the bids received is less than or equal to the

overall size limit, or (B) at the stopout rate,

determined by evaluating bids in ascending

order by submitted rate up to the point at which

the total quantity of bids equals the overall size

limit, with all bids below this rate awarded in full

at the stopout rate and all bids at the stopout

rate awarded on a pro rata basis, if the sum of

the counterparty offers received is greater than

the overall size limit, and (vi) offered beginning

with the operation conducted on September 22,

2014, with the resolution adopted at the Janu-

ary 28–29, 2014, FOMC meeting remaining in

place until the conclusion of the operation con-

ducted on September 19, 2014. The Chair must

approve any change in the offering rate within

the range specified in (i) and any changes to the

per-counterparty and overall size limits subject

to the limits specified in (iii) and (iv). The

System Open Market Account manager will

notify the FOMC in advance about any changes

to the offering rate, per-counterparty limit, or

overall size limit applied to operations. These

operations shall be authorized through Janu-

ary 30, 2015.”

By unanimous vote, the Committee ratified the Open

Market Desk’s domestic transactions over the inter-

meeting period. There were no intervention opera-

tions in foreign currencies for the System’s account

over the intermeeting period.

Monetary Policy Normalization

Meeting participants considered publication of a

summary statement of their monetary policy normal-

ization principles and plans based on the discussions

at recent Committee meetings. Participants agreed

that it was appropriate at this time to provide addi-

tional information regarding their approach to nor-

malization. The proposed statement was seen as a

concise summary of participants’ views that would

help the public understand the steps that the Com-

mittee plans to take when the time comes to begin the

normalization process and that would convey the

Committee’s confidence in its plans. However, it was

emphasized that the Committee would need to be

flexible and pragmatic during normalization, adjust-

ing the details of its approach, if necessary, in light of

changing conditions. Regarding the specific points in

the proposed statement, a couple of participants

expressed their preference that the principles make

greater allowance for sales of agency mortgage-

backed securities (MBS) over the next few years in

order to normalize the size and composition of the

Federal Reserve’s balance sheet more quickly and to

limit distortions in the allocation of credit that they

believed were associated with the Federal Reserve’s

holdings of agency MBS. In addition, a few partici-

pants noted that they would have preferred that the

principles point to an earlier end to the reinvestment

of repayments of principal on securities held in the

SOMA portfolio. At the end of the discussion, all but

one participant could support the publication of the

following statement after the meeting:

Policy Normalization Principles and Plans

During its recent meetings, the Federal Open

Market Committee (FOMC) discussed ways to

normalize the stance of monetary policy and the

Federal Reserve’s securities holdings. The dis-

224 101st Annual Report | 2014

cussions were part of prudent planning and do

not imply that normalization will necessarily

begin soon. The Committee continues to judge

that many of the normalization principles that it

adopted in June 2011 remain applicable. How-

ever, in light of the changes in the System Open

Market Account (SOMA) portfolio since 2011

and enhancements in the tools the Committee

will have available to implement policy during

normalization, the Committee has concluded

that some aspects of the eventual normalization

process will likely differ from those specified ear-

lier. The Committee also has agreed that it is

appropriate at this time to provide additional

information regarding its normalization plans.

All FOMC participants but one agreed on the

following key elements of the approach they

intend to implement when it becomes appropri-

ate to begin normalizing the stance of monetary

policy:

•

The Committee will determine the timing and

pace of policy normalization—meaning steps

to raise the federal funds rate and other short-

term interest rates to more normal levels and

to reduce the Federal Reserve’s securities hold-

ings—so as to promote its statutory mandate

of maximum employment and price stability.

—When economic conditions and the eco-

nomic outlook warrant a less accommoda-

tive monetary policy, the Committee will

raise its target range for the federal funds

rate.

—During normalization, the Federal Reserve

intends to move the federal funds rate into

the target range set by the FOMC primarily

by adjusting the interest rate it pays on

excess reserve balances.

—During normalization, the Federal Reserve

intends to use an overnight reverse repur-

chase agreement facility and other supple-

mentary tools as needed to help control the

federal funds rate. The Committee will use

an overnight reverse repurchase agreement

facility only to the extent necessary and will

phase it out when it is no longer needed to

help control the federal funds rate.

•

The Committee intends to reduce the Federal

Reserve’s securities holdings in a gradual and

predictable manner primarily by ceasing to

reinvest repayments of principal on securities

held in the SOMA.

—The Committee expects to cease or com-

mence phasing out reinvestments after it

begins increasing the target range for the

federal funds rate; the timing will depend on

how economic and financial conditions and

the economic outlook evolve.

—The Committee currently does not antici-

pate selling agency mortgage-backed securi-

ties as part of the normalization process,

although limited sales might be warranted in

the longer run to reduce or eliminate

residual holdings. The timing and pace of

any sales would be communicated to the

public in advance.

•

The Committee intends that the Federal

Reserve will, in the longer run, hold no more

securities than necessary to implement mon-

etary policy eff iciently and effectively, and that

it will hold primarily Treasury securities,

thereby minimizing the effect of Federal

Reserve holdings on the allocation of credit

across sectors of the economy.

•

The Committee is prepared to adjust the

details of its approach to policy normalization

in light of economic and financial

developments.

The Board meeting concluded at the end of the dis-

cussion of policy normalization principles and plans.

Staff Review of the Economic Situation

The information reviewed for the September 16–17

meeting suggested that economic activity was

expanding at a moderate pace in the third quarter.

Labor market conditions improved a little further,

although the unemployment rate was essentially

unchanged over the intermeeting period. Consumer

price inflation was running below the FOMC’s

longer-run objective of 2 percent, but measures of

longer-run inflation expectations remained stable.

Total nonfarm payroll employment increased in July

and August but at a slower pace than in the first half

of the year. The unemployment rate was 6.1 percent

in August, the same as in June, and the labor force

participation rate and the employment-to-population

ratio also were unchanged since that time. Both the

share of workers employed part time for economic

reasons and the rate of long-duration unemployment

declined a little over the past two months. Other

Minutes of Federal Open Market Committee Meetings | September 225

recent indicators generally pointed to ongoing

improvement in labor market conditions: Although

some measures of household expectations of the

labor market situation deteriorated somewhat, the

rates of job openings and of gross private-sector hir-

ing moved up, initial claims for unemployment insur-

ance were essentially flat at a relatively low level, and

some readings on firms’ hiring plans improved.

On balance, industrial production edged up over July

and August, and the rate of manufacturing capacity

utilization was unchanged. Automakers’ schedules

indicated that the pace of motor vehicle assemblies

would decline slightly in the fourth quarter, but

broader indicators of manufacturing production,

such as the readings on new orders from the national

and regional manufacturing surveys, were consistent

with moderate increases in factory output in the near

term.

Real personal consumption expenditures (PCE)

appeared to be rising at a moderate pace in the third

quarter.

The components of nominal retail sales

data used by the Bureau of Economic Analysis

(BEA) to construct its estimates of PCE increased at

a solid rate in July and August, and sales of light

motor vehicles surged in August after edging down in

July. Recent information pertaining to key factors

that influence consumer spending were positive: Real

disposable incomes continued to increase in July,

households’ net worth likely edged up as equity

prices and home values rose somewhat further, and

consumer sentiment as measured by the Thomson

Reuters/University of Michigan Surveys of Consum-

ers improved in August and early September.

The pace of activity in the housing sector seemed to

be picking up. Starts and permits of both new single-

family homes and multifamily units were higher in

July than their average levels in the second quarter.

Sales of existing homes increased further in July,

although new home sales declined.

Real private expenditures for business equipment and

intellectual property products appeared to rise fur-

ther going into the third quarter. Nominal shipments

of nondefense capital goods excluding aircraft moved

up in July. Moreover, new orders for these capital

goods continued to be above the level of shipments,

pointing to increases in shipments in subsequent

months. In addition, other forward-looking indica-

tors, such as surveys of business conditions, were

consistent with moderate gains in business equipment

spending in the near term. Nominal business expen-

ditures for nonresidential construction also increased

in July. Recent book-value data for inventories, along

with readings on inventories from national and

regional manufacturing surveys, did not point to sig-

nificant inventory imbalances in most industries; in

the energy sector, inventories were drawn down sig-

nificantly early in the year and, despite substantial

stockbuilding since then, remained low.

Total real government purchases seemed to be

roughly flat in the third quarter. Federal government

purchases probably declined a little, as defense

spending was lower in July and August than in the

second quarter. State and local government pur-

chases appeared to be rising slowly as the payrolls of

these governments expanded a bit further in July and

August and their nominal construction expenditures

increased in July.

The U.S. international trade deficit narrowed in both

June and July. Exports were little changed in June,

but they expanded robustly in July, with particular

strength in industrial supplies and automotive prod-

ucts. Imports fell in June but then partly recovered in

July, driven by swings in imports of oil and automo-

tive products.

Total U.S. consumer price inflation, as measured by

the PCE price index, was about 1½ percent over the

12 months ending in July. Over the 12 months ending

in August, the consumer price index (CPI) rose about

1¾ percent. Consumer energy prices declined in both

July and August, while consumer food prices rose.

Core price inflation (which excludes food and energy

prices) was essentially the same as total inflation for

the PCE price measure and for the CPI over their

most recent 12-month periods. Near-term inflation

expectations from the Michigan survey moved down

a bit in August and early September, while longer-

term inflation expectations in the survey were little

changed.

Measures of labor compensation increased a little

faster than consumer prices. Compensation per hour

in the business sector rose 2¾ percent over the year

ending in the second quarter; with modest gains in

labor productivity, unit labor costs advanced more

slowly than compensation per hour. Over the same

year-long period, the employment cost index rose

only about 2 percent, and average hourly earnings

Recently released data for health-services consumption in the

second quarter were notably stronger than the Bureau of Eco-

nomic Analysis estimated when constructing its most recent

PCE estimates for the second quarter.

226 101st Annual Report | 2014

increased at a similar rate over the 12 months ending

in August.

Foreign economies continued to expand in the sec-

ond quarter, but with significant differences across

countries. Economic growth rebounded strongly

from a weak first-quarter pace in Canada, China,

and Mexico, supported by improvement in exports.

In contrast, the Japanese economy contracted

sharply following the consumption tax increase in

April, economic activity stagnated in the euro area,

and the Brazilian economy fell into recession. In the

third quarter, household spending appeared to be

normalizing in Japan, and production continued to

rise in Mexico. However, indicators of economic

activity in the euro area remained weak, and Chinese

economic data for July and August suggested some

slowing in the third quarter. With inflation very low

in the euro area, the European Central Bank reduced

its policy interest rates at its September 4 meeting

and announced plans to purchase private assets.

Staff Review of the Financial Situation

Data releases on domestic economic activity were

reportedly interpreted by financial market partici-

pants as somewhat better than expected, on balance,

notwithstanding the disappointing employment

report for August. Federal Reserve communications,

particularly the July FOMC minutes and the Chair’s

speech at the Jackson Hole economic policy sympo-

sium, were viewed as signaling slightly less policy

accommodation than anticipated. Reflecting these

and other developments, yields on nominal Treasury

securities rose somewhat and equity prices edged up

over the intermeeting period. On net, the conflicts in

the Middle East and Ukraine and other geopolitical

tensions had limited effects on domestic financial

markets.

The federal funds rate path implied by financial mar-

ket quotes was essentially unchanged over the inter-

meeting period. But the results from the Desk’s Sep-

tember Survey of Primary Dealers indicated that the

distribution of the likely date of liftoff across dealers

shifted to somewhat earlier dates, and showed the

second quarter of 2015 as the most likely date for lift-

off. However, the dealers’ expected levels of various

employment and inflation indicators at the time of

liftoff did not change materially from the previous

survey.

The yield on 10-year nominal Treasury securities

moved up about 15 basis points, on net, since the

FOMC met in July, likely boosted in part by Federal

Reserve communications. Measures of inflation com-

pensation based on Treasury Inflation-Protected

Securities edged down, reportedly reflecting the

lower-than-expected CPI data in July and recent

declines in oil prices.

Broad measures of domestic equity prices were up

modestly over the intermeeting period, with some

reports suggesting that investors were interpreting

incoming economic data as implying that the eco-

nomic recovery was strengthening.

Yields on corporate bonds and agency MBS rose

about in line with those on comparable-maturity

Treasury securities. High-yield bond mutual funds

experienced sharp outflows early in the intermeeting

period, and spreads on such bonds widened notice-

ably; however, these spreads returned to their initial

levels over subsequent weeks, and high-yield bond

funds attracted modest inflows. Measures of liquidity

in the corporate bond market remained stable in the

face of these substantial flows.

Conditions in short-term dollar funding markets

were little changed. The Federal Reserve continued

its testing of ON RRP operations over the intermeet-

ing period. Take-up in ON RRP operations increased

a little, on average, over the period relative to the pre-

vious intermeeting period.

Credit conditions for domestic businesses remained

favorable. Corporate bond issuance slowed in July

and August, reflecting a fairly typical summer lull as

well as the elevated volatility in the high-yield bond

market early in the intermeeting period, but issuance

rebounded strongly in the first week of September.

Commercial paper outstanding and commercial and

industrial loans at banks expanded briskly. Credit

conditions in the commercial real estate (CRE) sector

continued to ease, and growth in CRE loans at banks

stayed solid. The issuance of commercial mortgage-

backed securities remained robust in July and

August.

Issuance of institutional leveraged loans continued

apace in July and August, traditionally a slow period

in this market. The issuance of “new money” loans,

which are typically earmarked for corporate

leveraged-buyouts and mergers and acquisitions, was

strong, and the pipeline of such loans was reported

to be quite large heading into the fall. The issuance of

collateralized loan obligations was still a major

source of demand for leveraged loans.

Minutes of Federal Open Market Committee Meetings | September 227

Financing conditions for households remained

mixed. Auto loans were widely available; standards

and terms for credit card loans eased somewhat,

though they were still tight; and access to residential

mortgages continued to be limited for all but those

with excellent credit histories.

Responding in part to disappointing economic data

abroad, the U.S. dollar appreciated against most cur-

rencies over the intermeeting period, including large

appreciations against the euro, the yen, and the

pound sterling. Greater monetary accommodation in

the euro area and expectations of a lower policy rate

in the near term added to the downward pressure on

the euro while uncertainty about the outcome of the

forthcoming referendum on Scottish independence

weighed on the value of the pound. In addition, near-

term policy rate expectations moved down in the

United Kingdom, reacting to both the release of the

August Inflation Report and uncertainty induced by

the referendum. Sovereign yields in the European

economies generally declined, and yield spreads of

sovereign bonds from the euro-area periphery over

German bunds narrowed considerably. Most foreign

equity indexes ended the period modestly higher.

Staff Economic Outlook

In the economic forecast prepared by the staff for the

September FOMC meeting, the projection for growth

in real gross domestic product (GDP) in the second

half of this year was revised down slightly from the

one prepared for the previous meeting, primarily

because of a somewhat weaker near-term outlook for

consumer spending. The staff’s medium-term fore-

cast for real GDP was also revised down a little,

reflecting a higher projected path for the foreign

exchange value of the dollar along with slightly

smaller projected gains for home prices. The staff still

anticipated that the pace of real GDP growth in 2015

and 2016 would exceed the growth rate of potential

output, supported by continued increases in con-

sumer and business confidence, the further easing of

the restraint on spending from changes in fiscal

policy, additional improvements in credit availability,

and a pickup in foreign economic growth. In 2017,

real GDP growth was projected to begin slowing

toward, but to remain above, the rate of potential

output growth. The expansion in economic activity

over the projection period was anticipated to steadily

reduce resource slack, and the unemployment rate

was expected to decline gradually and temporarily

move slightly below the staff’s estimate of its longer-

run natural rate toward the end of the period.

The staff’s near-term forecast for inflation was a little

lower than the projection prepared for the previous

FOMC meeting, reflecting recent readings on core

consumer price inflation that were lower than antici-

pated and declines in oil prices that were faster than

expected, but the forecast for inflation over the

medium term was little changed. The staff continued

to project inflation to be lower in the second half of

this year than in the first half and to remain below

the Committee’s longer-run objective of 2 percent

over the next few years. With longer-term inflation

expectations assumed to remain stable, resource slack

projected to diminish slowly, and changes in com-

modity and import prices expected to be subdued,

inflation was projected to rise gradually and to reach

the Committee’s objective in the longer run.

Overall, the staff’s economic projection for the Sep-

tember meeting was quite similar to the forecast pre-

sented at the June meeting, when the FOMC last pre-

pared a Summary of Economic Projections (SEP).

The staff’s September projection showed a slightly

higher path for the unemployment rate, a bit lower

real GDP growth, and essentially no change to infla-

tion compared with its June forecast.

The staff continued to view the uncertainty around

its projections for real GDP growth, the unemploy-

ment rate, and inflation as similar to the average over

the past 20 years. The risks to the forecast for real

GDP growth were still seen as tilted a little to the

downside, as neither monetary policy nor fiscal

policy was viewed as well positioned to help the

economy withstand adverse shocks. At the same

time, the staff viewed the risks around its outlook for

the unemployment rate and for inflation as roughly

balanced.

Participants’ Views on Current Conditions

and the Economic Outlook

In conjunction with this FOMC meeting, members

of the Board of Governors and the Federal Reserve

Bank presidents submitted their projections of real

output growth, the unemployment rate, inflation, and

the federal funds rate for each year from 2014

through 2017 and over the longer run, conditional on

each participant’s assessment of appropriate mon-

etary policy. The longer-run projections represent

each participant’s assessment of the value to which

each variable would be expected to converge, over

time, under appropriate monetary policy and in the

absence of further shocks to the economy. These eco-

nomic projections and policy assessments are

228 101st Annual Report | 2014

described in the SEP, which is attached as an adden-

dum to these minutes.

In their discussion of the economic situation and the

outlook, meeting participants viewed the infor mation

received over the intermeeting period as suggesting

that economic activity was expanding at a moderate

rate. On balance, labor market conditions improved

somewhat further; however, the unemployment rate

was little changed, and most participants judged that

there remained significant underutilization of labor

resources. Participants generally expected that, over

the medium term, real economic activity would

increase at a pace sufficient to lead to a further

gradual decline in the unemployment rate toward lev-

els consistent with the Committee’s objective of

maximum employment. Inflation was running below

the Committee’s longer-run objective, but longer-

term inflation expectations were stable. Participants

anticipated that inflation would move toward the

Committee’s 2 percent goal in coming years, with

several expressing concern that inflation might persist

below the Committee’s objective for quite some time.

Most viewed the risks to the outlook for economic

activity and the labor market as broadly balanced.

However, a number of participants noted that eco-

nomic growth over the medium term might be slower

than they expected if foreign economic growth came

in weaker than anticipated, structural productivity

continued to increase only slowly, or the recovery in

residential construction continued to lag.

Household spending appeared to be rising moder-

ately, with several participants noting that the recent

positive reports on retail sales, motor vehicle pur-

chases, and health-care spending had reduced their

concern about weakness in the underlying pace of

household spending. Among the favorable factors

attending the outlook for consumer spending, par-

ticipants cited continued gains in household wealth,

improved household balance sheets, low delinquency

rates, a high saving rate, or rising confidence in

employment and income prospects. However, other

participants said they heard mixed reports from busi-

ness contacts regarding consumer spending or were

uncertain about the prospects for stronger gains in

real income necessary to sustain moderate growth in

household spending.

The recovery in housing activity remained slow in all

but a few areas of the country despite relatively low

mortgage rates, rising house prices, and improve-

ments in household wealth. Contacts in a couple of

Districts reported that new construction was being

held back by shortages of materials, of lots available

for development, and of skilled workers or by the

overhang of vacant homes not on the market.

Households with relatively low credit scores contin-

ued to have difficulty obtaining mortgage loans. It

was noted that this difficulty could be a factor

restraining the demand for housing, particularly

among younger households who have high levels of

student loan debt or weak job prospects. A few par-

ticipants pointed out the relative strength in con-

struction of and demand for multifamily units, which

possibly was due to a shift in demand among

younger homebuyers away from single-family homes.

Information from business contacts in most parts of

the country indicated improvements in business con-

ditions, rising confidence about the economic out-

look, and increasing willingness to undertake new

investment projects. According to national and

regional surveys, manufacturing activity was strong,

and several participants had received reports of hir-

ing and increased capital spending in that sector.

Among the other industries cited as relatively strong

in recent months were transportation, energy, and

services. Several participants noted positive signs of

further increases in investment spending going for-

ward, including elevated levels of new orders and

shipments of capital goods, strong interest in the

technology sector, and the need to replace aging capi-

tal. A couple of participants added that nonresiden-

tial construction activity was rising in their Districts.

The improvement in business conditions was

reflected in reports of increased demand for loans at

banks in several Districts. Demand rose for loans to

both households and businesses, and a couple of par-

ticipants indicated that borrowers were expanding

their use of existing credit lines as well as obtaining

new commitments. Bankers in one District stated

that, while they had eased the terms and conditions

on loans in response to competition from other lend-

ers, they had not taken on riskier loans. Some finan-

cial developments that could under mine financial sta-

bility over time were noted, including a deterioration

in leveraged lending standards, stretched stock mar-

ket valuations, and compressed risk spreads. How-

ever, one participant suggested that the leveraged

loan market seemed to be moving into better balance,

and that market participants appeared to be taking

appropriate account of the changes in interest rates

that might be associated with the eventual normaliza-

tion of the stance of monetary policy. Moreover, a

couple of participants, while stressing the importance

of remaining vigilant about potential risks to finan-

Minutes of Federal Open Market Committee Meetings | September 229

cial stability, observed that conditions in financial

markets at present did not suggest the types of finan-

cial stability considerations that would impede the

achievement of the Committee’s macroeconomic

objectives.

Some participants noted that expectations for the

path of the federal funds rate implied by market

quotes appeared to remain below most of the projec-

tions of the federal funds rate provided by Commit-

tee participants in the SEP, which represent each

individual participant’s assessment of the appropri-

ate path for the federal funds rate consistent with his

or her economic outlook. However, it was pointed

out that measures of financial market participants’

expectations incorporate their judgments regarding

not only the most likely outcomes, but also the pos-

sible downside tail risks that might be associated with

especially low paths for the federal funds rate. For

example, respondents to the recent Survey of Pri-

mary Dealers placed considerable odds on the federal

funds rate returning to the zero lower bound during

the two years following the initial increase in that

rate. The probability that investors attach to such low

interest rate scenarios could pull the expected path of

the federal funds rate computed from market quotes

below most Committee participants’ assessments of

appropriate policy as reported in the SEP.

The restraint on economic activity from fiscal policy

was seen as diminishing, and a couple of participants

pointed out that, over the second half of the year, the

remaining drag was likely to be small. Nonetheless,

the cutbacks in both defense and nondefense federal

outlays, as well as state governments’ budget

restraint, continued to weigh on jobs and income in

some parts of the country. Fiscal policy overall was

anticipated to be a neutral factor for economic

growth over the next several years.

During participants’ discussion of prospects for eco-

nomic activity abroad, they commented on a number

of uncertainties and risks attending the outlook.

Over the intermeeting period, the foreign exchange

value of the dollar had appreciated, particularly

against the euro, the yen, and the pound sterling.

Some participants expressed concern that the persis-

tent shortfall of economic growth and inflation in the

euro area could lead to a further appreciation of the

dollar and have adverse effects on the U.S. external

sector. Several participants added that slower eco-

nomic growth in China or Japan or unanticipated

events in the Middle East or Ukraine might pose a

similar risk. At the same time, a couple of partici-

pants pointed out that the appreciation of the dollar

might also tend to slow the gradual increase in infla-

tion toward the FOMC’s 2 percent goal.

Labor market conditions continued to improve over

the intermeeting period. Although the unemploy-

ment rate was little changed, participants variously

cited positive readings from other indicators, includ-

ing a decline in longer-term unemployment, the low

level of new claims for unemployment insurance, the

rise in job openings, and survey reports of increased

hiring plans and job availability. While the most

recent estimate of nonfarm payroll employment

showed a smaller monthly gain than earlier in the

year, it followed six months in which increases had

averaged more than 200,000. Some participants were

reluctant to place much weight on one monthly

report or noted that the first estimate for August has

frequently been revised up in recent years. Partici-

pants generally agreed that the accumulated progress

in labor market conditions since the Committee’s

current asset purchase program began in Septem-

ber 2012 had been substantial and expected that

progress would be sustained. Nonetheless, they con-

tinued to express differing views on the extent of

remaining slack in labor markets. Most agreed that

underutilization of labor resources remained signifi-

cant; these participants noted variously that the level

of nonfarm payroll jobs had only recently returned

to its pre-recession level, that the number of indi-

viduals working part time for economic reasons was

still elevated relative to the level of unemployment,

and that the labor force participation rate was still

below assessments of its structural trend. In this

regard, a couple of participants pointed out that the

stability of the participation rate, on balance, over

the past year suggested that some of the cyclical

shortfall had diminished. Most agreed that the Com-

mittee’s assessment of labor market slack should be

grounded in its review of a range of labor market

indicators, although a few saw the gap between the

unemployment rate and their estimate of its longer-

run normal level as a reliable indicator of slack.

Most measures of labor compensation showed no

broad-based increase in wage inflation. However,

businesses in several Districts continued to report

upward pressure on wages in specific industries and

occupations associated with labor shortages or

difficult-to-fill jobs, while a couple of participants

noted a more general rise in current or planned wage

increases in their regions. Several participants com-

mented that the relatively subdued rise in nominal

labor compensation was still below longer-run trend

230 101st Annual Report | 2014

rates of productivity growth and inflation and was a

signal of slack remaining in the labor market. How-

ever, a couple of others suggested some caution in

reading subdued wage inflation as an indicator of

labor market underutilization. They pointed out that

if nominal wages did not adjust downward when

unemployment was high, pent-up wage deflation

could help explain the modest increases in wages so

far during the recovery, and wages could rise more

rapidly going forward as the unemployment rate con-

tinues to decline.

Inflation had been running below the Committee’s

longer-run objective, and the readings on consumer

prices over the intermeeting period were somewhat

softer than during the preceding four months, in part

because of declining energy prices. Most participants

anticipated that inflation would move gradually back

toward its objective over the medium term. However,

participants differed somewhat in their assessments

of how quickly inflation would move up. Some cited

the stability of longer-run inflation expectations at a

level consistent with the Committee’s objective as an

important factor in their forecasts that inflation

would reach 2 percent in coming years. Participants’

views on the responsiveness of inflation to the level

and change in resource utilization varied, with a few

seeing labor markets as sufficiently tight that wages

and prices would soon begin to move up noticeably

but with some others indicating that inflation was

unlikely to approach 2 percent until the unemploy-

ment rate falls below its longer-run normal level.

While most viewed the risk that inflation would run

persistently below 2 percent as having diminished

somewhat since earlier in the year, a couple noted the

possibility that longer-term inflation expectations

might be slightly lower than the Committee’s 2 per-

cent objective or that domestic inflation might be

held down by persistent disinflation among U.S. trad-

ing partners and further appreciation of the dollar.

In their discussion of the appropriate path for mon-

etary policy over the medium term, meeting partici-

pants agreed that the timing of the first increase in

the federal funds rate and the appropriate path of the

policy rate thereafter would depend on incoming eco-

nomic data and their implications for the outlook.

That said, several participants thought that the cur-

rent forward guidance regarding the federal funds

rate suggested a longer period before liftoff, and per-

haps also a more gradual increase in the federal funds

rate thereafter, than they believed was likely to be

appropriate given economic and financial conditions.

In addition, the concern was raised that the reference

to “considerable time” in the current forward guid-

ance could be misunderstood as a commitment

rather than as data dependent. However, it was noted

that the current formulation of the Committee’s for-

ward guidance clearly indicated that the Committee’s

policy decisions were conditional on its ongoing

assessment of realized and expected progress toward

its objectives of maximum employment and 2 percent

inflation, and that its assessment reflected its review

of a broad array of economic indicators. It was

emphasized that the current forward guidance for the

federal funds rate was data dependent and did not

indicate that the first increase in the target range for

the federal funds rate would occur mechanically after

some fixed calendar interval following the completion

of the current asset purchase program. If employ-

ment and inflation converged more rapidly toward

the Committee’s goals than currently expected, the

date of liftoff could be earlier, and subsequent

increases in the federal funds rate target more rapid,

than participants currently anticipated. Conversely, if

employment and inflation returned toward the Com-

mittee’s objectives more slowly than currently antici-

pated, the date of liftoff for the federal funds rate

could be later, and future federal funds rate target

increases could be more gradual. In addition, some

participants saw the current forward guidance as

appropriate in light of risk-management consider-

ations, which suggested that it would be prudent to

err on the side of patience while awaiting further evi-

dence of sustained progress toward the Committee’s

goals. In their view, the costs of downside shocks to

the economy would be larger than those of upside

shocks because, in current circumstances, it would be

less problematic to remove accommodation quickly,

if doing so becomes necessary, than to add accom-

modation. A number of participants also noted that

changes to the forward guidance might be misinter-

preted as a signal of a fundamental shift in the stance

of policy that could result in an unintended tighten-

ing of financial conditions.

Participants also discussed how the forward-guidance

language might evolve once the Committee decides

that the current formulation no longer appropriately

conveys its intentions about the future stance of

policy. Most participants indicated a preference for

clarifying the dependence of the current forward

guidance on economic data and the Committee’s

assessment of progress toward its objectives of maxi-

mum employment and 2 percent inflation. A clarifi-

cation along these lines was seen as likely to improve

the public’s understanding of the Committee’s reac-

tion function while allowing the Committee to retain

Minutes of Federal Open Market Committee Meetings | September 231

flexibility to respond appropriately to changes in the

economic outlook. One participant favored using a

numerical threshold based on the inflation outlook as

a form of forward guidance. A few participants, how-

ever, noted the difficulties associated with expressing

forward guidance in terms of numerical thresholds

for some set of economic variables. Another partici-

pant indicated a preference for reducing reliance on

explicit forward guidance in the statement and con-

veying instead guidance regarding the future stance

of monetary policy through other mechanisms,

including the SEP. It was noted that providing

explicit forward guidance regarding the future path

of the federal funds rate might become less impor-

tant once a highly accommodative stance of policy is

no longer appropriate and the process of policy nor-

malization is well under way. It was generally agreed

that when changes to the forward guidance become

appropriate, they will likely present communication

challenges, and that caution will be needed to avoid

sending unintended signals about the Committee’s

policy outlook.

Committee Policy Action

In their discussion of monetary policy for the period

ahead, members judged that information received

since the FOMC met in July indicated that economic

activity was expanding at a moderate pace. House-

hold spending appeared to be rising moderately, and

business fixed investment was advancing, while the

recovery in the housing sector remained slow. Fiscal

policy was restraining economic growth, although the

extent of restraint was diminishing and would soon

be quite small. Inflation was running below the Com-

mittee’s longer-run objective, but longer-term infla-

tion expectations were stable. The Committee

expected that, with appropriate policy accommoda-

tion, economic activity would expand at a moderate

pace, with labor market indicators and inflation mov-

ing toward levels that the Committee judges consis-

tent with its dual mandate.

With incoming information continuing to broadly

support the Committee’s expectation of ongoing

improvement in labor market conditions and infla-

tion moving back toward the Committee’s 2 percent

objective, members agreed that a further measured

reduction in the pace of asset purchases was appro-

priate at this meeting. Accordingly, the Committee

agreed that, beginning in October, it would add to its

holdings of agency MBS at a pace of $5 billion per

month rather than $10 billion per month, and it

would add to its holdings of longer-term Treasury

securities at a pace of $10 billion per month rather

than $15 billion per month. The Committee judged

that, if incoming information broadly supported its

expectations that labor market indicator and infla-

tion would continue to move toward mandate-

consistent levels, it would end its current program of

asset purchases at its October meeting.

Members discussed their assessments of progress

toward the Committee’s objectives of maximum

employment and 2 percent inflation and considered

possible enhancements to the statement that would

more clearly communicate the Committee’s view on

such progress. Regarding the labor market, many

members indicated that, although labor market con-

ditions had generally continued to improve, there was

still significant slack in labor markets. A few mem-

bers, however, expressed reservations about continu-

ing to characterize the extent of underutilization of

labor resources as significant. In the end, members

agreed to indicate that labor market conditions had

improved somewhat further, but that the unemploy-

ment rate was little changed and a range of labor

market indicators continued to suggest that there

remained significant underutilization of labor

resources. It was noted, however, that the character-

ization of labor market underutilization might have

to be changed if progress in the labor market contin-

ued. Regarding inflation, members agreed that infla-

tion had moved closer to the Committee’s 2 percent

objective during the first half of the year but, more

recently, had fallen back somewhat. As a conse-

quence, they updated the language in the statement

to indicate that inflation had been running below the

Committee’s longer-run objective. However, with

stable longer-term inflation expectations, the Com-

mittee continued to judge that the likelihood of infla-

tion running persistently below 2 percent had dimin-

ished somewhat since early in the year.

After the discussion, all members but two voted to

maintain the Committee’s target range for the federal

funds rate and to reiterate its forward guidance about

the federal funds rate. The guidance continued to

state that the Committee’s decisions about how long

to maintain the current target range for the federal

funds rate would depend on its assessment of actual

and expected progress toward its objectives of maxi-

mum employment and 2 percent inflation. The Com-

mittee again anticipated that it likely would be appro-

priate to maintain the current target range for the

federal funds rate for a considerable time after the

asset purchase program ends, especially if projected

inflation continued to run below the Committee’s

232 101st Annual Report | 2014

2 percent longer-run goal, and provided that longer-

term inflation expectations remained well anchored.

The forward guidance also reiterated the Commit-

tee’s expectation that, even after employment and

inflation are near mandate-consistent levels, eco-

nomic conditions may, for some time, warrant keep-

ing the target federal funds rate below levels the

Committee views as normal in the longer run. Two

members, however, dissented because, in their view,

the statement language did not accurately reflect the

progress made to date toward the Committee’s goals

of maximum employment and inflation of 2 percent,

and they believed that ongoing progress will likely

warrant an earlier increase in the federal funds rate

than suggested by the forward guidance in the Com-

mittee’s postmeeting statement.

At the conclusion of the discussion, the Committee

voted to authorize and direct the Federal Reserve

Bank of New York, until it was instructed otherwise,

to execute transactions in the SOMA in accordance

with the following domestic policy directive:

“Consistent with its statutory mandate, the Fed-

eral Open Market Committee seeks monetary

and financial conditions that will foster maxi-

mum employment and price stability. In particu-

lar, the Committee seeks conditions in reserve

markets consistent with federal funds trading in

a range from 0 to ¼ percent. The Committee

directs the Desk to undertake open market

operations as necessary to maintain such condi-

tions. Beginning in October, the Desk is directed

to purchase longer-term Treasury securities at a

pace of about $10 billion per month and to pur-

chase agency mortgage-backed securities at a

pace of about $5 billion per month. The Com-

mittee also directs the Desk to engage in dollar

roll and coupon swap transactions as necessary

to facilitate settlement of the Federal Reserve’s

agency mortgage-backed securities transactions.

The Committee directs the Desk to maintain its

policy of rolling over maturing Treasury securi-

ties into new issues and its policy of reinvesting

principal payments on all agency debt and

agency mortgage-backed securities in agency

mortgage-backed securities. The System Open

Market Account manager and the secretary will

keep the Committee informed of ongoing devel-

opments regarding the System’s balance sheet

that could affect the attainment over time of the

Committee’s objectives of maximum employ-

ment and price stability.”

The vote encompassed approval of the statement

below to be released at 2:00 p.m.:

“Information received since the Federal Open

Market Committee met in July suggests that

economic activity is expanding at a moderate

pace. On balance, labor market conditions

improved somewhat further; however, the unem-

ployment rate is little changed and a range of

labor market indicators suggests that there

remains significant underutilization of labor

resources. Household spending appears to be

rising moderately and business fixed investment

is advancing, while the recovery in the housing

sector remains slow. Fiscal policy is restraining

economic growth, although the extent of

restraint is diminishing. Inflation has been run-

ning below the Committee’s longer-run objec-

tive. Longer-term inflation expectations have

remained stable.

Consistent with its statutory mandate, the Com-

mittee seeks to foster maximum employment

and price stability. The Committee expects that,

with appropriate policy accommodation, eco-

nomic activity will expand at a moderate pace,

with labor market indicators and inflation mov-

ing toward levels the Committee judges consis-

tent with its dual mandate. The Committee sees

the risks to the outlook for economic activity

and the labor market as nearly balanced and

judges that the likelihood of inflation running

persistently below 2 percent has diminished

somewhat since early this year.

The Committee currently judges that there is

sufficient underlying strength in the broader

economy to support ongoing improvement in

labor market conditions. In light of the cumula-

tive progress toward maximum employment and

the improvement in the outlook for labor market

conditions since the inception of the current

asset purchase program, the Committee decided

to make a further measured reduction in the

pace of its asset purchases. Beginning in Octo-

ber, the Committee will add to its holdings of

agency mortgage-backed securities at a pace of

$5 billion per month rather than $10 billion per

month, and will add to its holdings of longer-

term Treasury securities at a pace of $10 billion

per month rather than $15 billion per month.

The Committee is maintaining its existing policy

of reinvesting principal payments from its hold-

Minutes of Federal Open Market Committee Meetings | September 233

ings of agency debt and agency mortgage-

backed securities in agency mortgage-backed

securities and of rolling over maturing Treasury

securities at auction. The Committee’s sizable

and still-increasing holdings of longer-term

securities should maintain downward pressure

on longer-term interest rates, support mortgage

markets, and help to make broader financial

conditions more accommodative, which in turn

should promote a stronger economic recovery

and help to ensure that inflation, over time, is at

the rate most consistent with the Committee’s

dual mandate.

The Committee will closely monitor incoming

information on economic and financial develop-

ments in coming months and will continue its

purchases of Treasury and agency mortgage-

backed securities, and employ its other policy

tools as appropriate, until the outlook for the

labor market has improved substantially in a

context of price stability. If incoming informa-

tion broadly supports the Committee’s expecta-

tion of ongoing improvement in labor market

conditions and inflation moving back toward its

longer-run objective, the Committee will end its

current program of asset purchases at its next

meeting. However, asset purchases are not on a

preset course, and the Committee’s decisions

about their pace will remain contingent on the

Committee’s outlook for the labor market and

inflation as well as its assessment of the likely

efficacy and costs of such purchases.

To support continued progress toward maxi-

mum employment and price stability, the Com-

mittee today reaffirmed its view that a highly

accommodative stance of monetary policy

remains appropriate. In determining how long to

maintain the current 0 to ¼ percent target range

for the federal funds rate, the Committee will

assess progress—both realized and expected—

toward its objectives of maximum employment

and 2 percent inflation. This assessment will take

into account a wide range of information,

including measures of labor market conditions,

indicators of inflation pressures and inflation

expectations, and readings on financial develop-

ments. The Committee continues to anticipate,

based on its assessment of these factors, that it

likely will be appropriate to maintain the current

target range for the federal funds rate for a con-

siderable time after the asset purchase program

ends, especially if projected inflation continues

to run below the Committee’s 2 percent longer-

run goal, and provided that longer-term infla-

tion expectations remain well anchored.

When the Committee decides to begin to remove

policy accommodation, it will take a balanced

approach consistent with its longer-run goals of

maximum employment and inflation of 2 per-

cent. The Committee currently anticipates that,

even after employment and inflation are near

mandate-consistent levels, economic conditions

may, for some time, warrant keeping the target

federal funds rate below levels the Committee

views as normal in the longer run.”

Voting for this action: Janet L. Yellen, William C.

Dudley, Lael Brainard, Stanley Fischer, Narayana

Kocherlakota, Loretta J. Mester, Jerome H. Powell,

and Daniel K. Tarullo.

Voting against this action: Richard W. Fisher and

Charles I. Plosser.

President Fisher dissented because he believed that

the continued strengthening of the real economy, the

improved outlook for labor utilization and for gen-

eral price stability, and continued signs of financial

market excess will likely warrant an earlier reduction

in monetary accommodation than is suggested by the

Committee’s stated forward guidance.

Mr. Plosser dissented because he objected to the

statement’s guidance indicating that it likely will be

appropriate to maintain the current target range for

the federal funds rate for “a considerable time after

the asset purchase program ends.” In his view, the

reference to calendar time should be replaced with

language that indicates how monetary policy will

respond to incoming data. Moreover, he judged that

the statement did not acknowledge the substantial

progress that had been made toward the Committee’s

economic goals and thus risks unnecessary and dis-

ruptive volatility in financial markets, and perhaps in

the economy, if the Committee reduces accommoda-

tion sooner or more quickly than financial markets

anticipate.

It was agreed that the next meeting of the Committee

would be held on Tuesday–Wednesday, October 28–

29, 2014. The meeting adjourned at 10:35 a.m. on

September 17, 2014.

234 101st Annual Report | 2014

Notation Vote

By notation vote completed on August 19, 2014, the

Committee unanimously approved the minutes of the

Committee meeting held on July 29–30, 2014.

William B. English

Secretary

Addendum:

Summary of Economic Projections

In conjunction with the September 16–17, 2014, Fed-

eral Open Market Committee (FOMC) meeting,

meeting participants submitted their projections of

real output growth, the unemployment rate, inflation,

and the federal funds rate for each year from 2014

through 2017 and in the longer run.

Each partici-

pant’s projection was based on information available

at the time of the meeting plus his or her assessment

of appropriate monetary policy and assumptions

about the factors likely to affect economic outcomes.

The longer-run projections represent each partici-

pant’s assessment of the value to which each variable

would be expected to converge, over time, under

appropriate monetary policy and in the absence of

further shocks to the economy. “Appropriate mon-

etary policy” is defined as the future path of policy

that each participant deems most likely to foster out-

comes for economic activity and inflation that best

satisfy his or her individual interpretation of the Fed-

eral Reserve’s objectives of maximum employment

and stable prices.

Overall, FOMC participants expected that, under

appropriate monetary policy, economic growth

would be faster in the second half of 2014 and in

2015 than their estimates of the U.S. economy’s

longer-run normal growth rate. Participants then saw

real growth moving back slowly toward its longer-run

rate in 2016 and 2017. The unemployment rate was

projected to continue to decline gradually over the

forecast period, and to be at or below participants’

individual judgments of its longer-run normal level

by the end of 2017 (

table 1 and figure 1). Almost all

participants projected that inflation, as measured by

the four-quarter change in the price index for per-

sonal consumption expenditures (PCE), would rise

gradually over the next few years, reaching a level at

or near the Committee’s 2 percent objective in 2016

or 2017.

Participants judged that it would be appropriate to

begin adjusting the current highly accommodative

stance of policy over the projection period as labor

As discussed in its Policy Normalization Principles and Plans,

released on September 17, 2014, the Committee intends to tar-

get a range for the federal funds rate during normalization. Par-

ticipants were asked to provide, in their contributions to the

Summary of Economic Projections, either the midpoint of the

target range for the federal funds rate for any period when a

range was anticipated or the target level for the federal funds

rate, as appropriate. In the lower panel of

figure 2, these values

have been rounded to the nearest ⅛ percentage point.

Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, September 2014

Percent

Variable

Central tendency

Range

2014 2015 2016 2017 Longer run 2014 2015 2016 2017 Longer run

Change in real GDP 2.0 to 2.2 2.6 to 3.0 2.6 to 2.9 2.3 to 2.5 2.0 to 2.3 1.8 to 2.3 2.1 to 3.2 2.1 to 3.0 2.0 to 2.6 1.8 to 2.6

June projection 2.1 to 2.3 3.0 to 3.2 2.5 to 3.0 n.a. 2.1 to 2.3 1.9 to 2.4 2.2 to 3.6 2.2 to 3.2 n.a. 1.8 to 2.5

Unemployment rate 5.9 to 6.0 5.4 to 5.6 5.1 to 5.4 4.9 to 5.3 5.2 to 5.5 5.7 to 6.1 5.2 to 5.7 4.9 to 5.6 4.7 to 5.8 5.0 to 6.0

June projection 6.0 to 6.1 5.4 to 5.7 5.1 to 5.5 n.a. 5.2 to 5.5 5.8 to 6.2 5.2 to 5.9 5.0 to 5.6 n.a. 5.0 to 6.0

PCE inflation 1.5 to 1.7 1.6 to 1.9 1.7 to 2.0 1.9 to 2.0 2.0 1.5 to 1.8 1.5 to 2.4 1.6 to 2.1 1.7 to 2.2 2.0

June projection 1.5 to 1.7 1.5 to 2.0 1.6 to 2.0 n.a. 2.0 1.4 to 2.0 1.4 to 2.4 1.5 to 2.0 n.a. 2.0

Core PCE inflation

1.5 to 1.6 1.6 to 1.9 1.8 to 2.0 1.9 to 2.0 1.5 to 1.8 1.6 to 2.4 1.7 to 2.2 1.8 to 2.2

June projection 1.5 to 1.6 1.6 to 2.0 1.7 to 2.0 n.a. 1.4 to 1.8 1.5 to 2.4 1.6 to 2.0 n.a.

Note: Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are from the fourth quarter of the previous year to the fourth

quarter of the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index for personal consumption expenditures

(PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the

year indicated. Each participant’s projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each participant’s

assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy. The June

projections were made in conjunction with the meeting of the Federal Open Market Committee on June 17–18, 2014.

The central tendency excludes the three highest and three lowest projections for each variable in each year.

The range for a variable in a given year includes all participants’ projections, from lowest to highest, for that variable in that year.

Longer-run projections for core PCE inflation are not collected.

Minutes of Federal Open Market Committee Meetings | September 235

Figure 1. Central tendencies and ranges of economic projections, 2014–17 and over the longer run

Change in real GDP

Percent

2009 2010 2011 2012 2013 2014 2015 2016 2017 Longer

run

Central tendency of projections

Range of projections

Actual

Unemployment rate

2009 2010 2011 2012 2013 2014 2015 2016 2017 Longer

run

PCE ination

2009 2010 2011 2012 2013 2014 2015 2016 2017 Longer

run

Core PCE ination

2009 2010 2011 2012 2013 2014 2015 2016 2017 Longer

run

Note: Definitions of variables are in the general note to table 1. The data for the actual values of the variables are annual.

236 101st Annual Report | 2014

market indicators and inflation move back toward

values the Committee judges consistent with the

attainment of its mandated objectives of maximum

employment and stable prices. As shown in

figure 2,

all but a few participants anticipated that it would be

appropriate to begin raising the target range for the

federal funds rate in 2015, with most projecting that

it will be appropriate to raise the target federal funds

rate fairly gradually. Consistent with the improve-

ment in the outlook for the labor market since the

Committee began its current asset purchase program

in September 2012, as well as participants’ expecta-

tion of ongoing improvement in labor market condi-

tions and inflation moving back toward their longer-

run objective, all participants judged that it would be

appropriate to complete the asset purchase program

in October of this year.

Most participants saw the uncertainty associated

with their outlooks for economic growth, the unem-

ployment rate, and inflation as similar to that of the

past 20 years, although a few judged it as somewhat

higher. In addition, most participants considered the

risks to the outlook for real gross domestic product

(GDP) growth and the unemployment rate to be

broadly balanced, and a substantial majority saw the

risks to inflation as broadly balanced. However, a few

participants, on net, saw the risks to their forecasts

for economic growth or inflation as tilted to the

downside.

The Outlook for Economic Activity

Participants generally projected that, conditional on

their individual assumptions about appropriate mon-

etary policy, economic growth would pick up from its

low level in the first half of the year and run above

their estimates of the longer-run normal rate of eco-

nomic growth in the second half of 2014 and in 2015.

Participants pointed to a number of factors that they

expected would contribute to a pickup in economic

growth in the second half of this year and next year,

including rising household net worth, diminished

restraint from fiscal policy, improving labor market

conditions, and highly accommodative monetary

policy. In general, participants then saw real growth

moving gradually back toward, but remaining at or

somewhat above, its longer-run rate in 2016 and

2017.

Many participants revised down their projections of

real GDP growth somewhat in one or more years and

particularly for 2015, compared with their projec-

tions in June. Participants pointed to a couple of fac-

tors leading them to mark down their projected paths

for real GDP growth including the incorporation of

weaker-than-expected data on consumer spending

and perceptions of slower growth in potential GDP.

The central tendencies of participants’ projections

for real GDP growth in their most recent projections

were 2.0 to 2.2 percent in 2014, 2.6 to 3.0 percent in

2015, 2.6 to 2.9 percent in 2016, and 2.3 to 2.5 per-

cent in 2017. The central tendency of the projections

of real GDP growth over the longer run was 2.0 to

2.3 percent, essentially the same as in June.

Participants anticipated that the unemployment rate

would continue to decline gradually over the forecast

period and, by the fourth quarter of 2017, would be

close to or below their individual assessments of its

longer-run normal level. The central tendencies of

participants’ forecasts for the unemployment rate in

the fourth quarter of each year were 5.9 to 6.0 per-

cent in 2014, 5.4 to 5.6 percent in 2015, 5.1 to 5.4 per-

cent in 2016, and 4.9 to 5.3 percent in 2017. Partici-

pants’ projected paths for the unemployment rate

were slightly lower than in June, with many partici-

pants citing lower-than-expected incoming unem-

ployment data. The central tendency of participants’

estimates of the longer-run normal rate of unem-

ployment that would prevail under appropriate mon-

etary policy and in the absence of further shocks to

the economy was unchanged at 5.2 to 5.5 percent.

Figures 3.A and 3.B show that participants held a

range of views regarding the likely outcomes for real

GDP growth and the unemployment rate through

2017. The diversity of views reflected their individual

assessments of the rate at which the forces that have

been restraining the pace of the economic recovery

would abate, of the anticipated path for foreign eco-

nomic activity, of the trajectory for growth in con-

sumption as labor market slack diminishes, and of

the appropriate path of monetary policy. Relative to

June, the dispersions of participants’ projections for

real GDP growth and for the unemployment rate

over the entire projection period were little changed.

The Outlook for Inflation

Compared with June, the central tendencies of par-

ticipants’ projections for inflation under the assump-

tion of appropriate policy were largely unchanged for

2014 to 2016, and the trends anticipated over that

period were generally expected to continue in 2017.

Almost all participants projected that PCE inflation

would rise gradually over the next few years to a level

at or near the Committee’s 2 percent objective. A few

Minutes of Federal Open Market Committee Meetings | September 237

Figure 2. Overview of FOMC participants’ assessments of appropriate monetary policy

Appropriate timing of policy rming

Number of participants

2014 2015 2016

Percent

Appropriate pace of policy rming: Midpoint of target range or target level for the federal funds rate

0.5

1.5

2.5

3.5

4.5

2014 2015 2016 2017 Longer run

Note: In the upper panel, the height of each bar denotes the number of FOMC participants who judge that, under appropriate monetary policy, the first increase in the target

range for the federal funds rate from its current range of 0 to ¼ percent will occur in the specified calendar year. In June 2014, the numbers of FOMC participants who judged

that the first increase in the target federal funds rate would occur in 2014, 2015, and 2016 were, respectively, 1, 12, and 3. In the lower panel, each shaded circle indicates the

value (rounded to the nearest ⅛ percentage point) of an individual participant’s judgment of the midpoint of the appropriate target range for the federal funds rate or the appro-

priate target level for the federal funds rate at the end of the specified calendar year or over the longer run.

238 101st Annual Report | 2014

Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2014–17 and over the longer run

2014

Number of participants

1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6

- - - - - - - - - -

1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7

Percent range

September projections

June projections

2015

Number of participants

1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6

- - - - - - - - - -

1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7

Percent range

2016

Number of participants

1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6

- - - - - - - - - -

1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7

Percent range

2017

Number of participants

1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6

- - - - - - - - - -

1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7

Percent range

Longer run

Number of participants

1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6

- - - - - - - - - -

1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7

Percent range

Note: Definitions of variables are in the general note to table 1.

Minutes of Federal Open Market Committee Meetings | September 239

Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2014–17 and over the longer run

2014

Number of participants

4.6 4.8 5.0 5.2 5.4 5.6 5.8 6.0 6.2

- - - - - - - - -

4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1 6.3

Percent range

September projections

June projections

2015

Number of participants

4.6 4.8 5.0 5.2 5.4 5.6 5.8 6.0 6.2

- - - - - - - - -

4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1 6.3

Percent range

2016

Number of participants

4.6 4.8 5.0 5.2 5.4 5.6 5.8 6.0 6.2

- - - - - - - - -

4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1 6.3

Percent range

2017

Number of participants

4.6 4.8 5.0 5.2 5.4 5.6 5.8 6.0 6.2

- - - - - - - - -

4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1 6.3

Percent range

Longer run

Number of participants

4.6 4.8 5.0 5.2 5.4 5.6 5.8 6.0 6.2

- - - - - - - - -

4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1 6.3

Percent range

Note: Definitions of variables are in the general note to table 1.

240 101st Annual Report | 2014

participants expected PCE inflation to rise somewhat

above 2 percent at some point during the forecast

period, while several others expected inflation to

remain below 2 percent even at the end of 2017. The

central tendencies for PCE inflation were 1.5 to

1.7 percent in 2014, 1.6 to 1.9 percent in 2015, 1.7 to

2.0 percent in 2016, and 1.9 to 2.0 percent in 2017.

The central tendencies of the forecasts for core infla-

tion were broadly similar to those for the headline

measure. It was noted that a combination of fac-

tors—including stable inflation expectations, steadily

diminishing resource slack, a pickup in wage growth,

a gradual decline in the foreign exchange value for

the dollar, and still-accommodative monetary

policy—was likely to contribute to a gradual rise of

inflation back toward the Committee’s longer-run

objective of 2 percent.

Figures 3.C and 3.D provide information on the

diversity of participants’ views about the outlook for

inflation. The ranges of participants’ projections for

inflation in 2014, 2015, and 2016 were little changed

relative to June. The range in 2017 shows a very sub-

stantial concentration near the Committee’s 2 per-

cent longer-run objective by that time.

Appropriate Monetary Policy

Participants judged that it would be appropriate to

begin reducing policy accommodation over the pro-

jection period as labor market indicators and infla-

tion move back toward values the Committee judges

consistent with the attainment of its mandated objec-

tives of maximum employment and price stability. As

shown in figure 2, all but a few participants antici-

pated that it would be appropriate to begin raising

the target range for the federal funds rate in 2015,

and most projected that the appropriate level of the

federal funds rate would remain below its longer-run

normal level through 2016. Most participants

expected the appropriate level of the federal funds

rate would be approaching, or would already have

reached, their individual view of its longer-run nor-

mal level by the end of 2017.

All participants projected that the unemployment

rate would be below 5.75 percent at the end of the

year in which they judged the initial increase in the

target range for the federal funds rate would be war-

ranted, and all but one anticipated that inflation

would be at or below the Committee’s 2 percent goal

at that time. Most participants projected that the

unemployment rate would be above their estimates of

its longer-run normal level at the end of the year in

which they saw the target range for the federal funds

rate increasing from its effective lower bound,

although all but one thought that, by the end of

2016, the unemployment rate would be at or below

their individual judgments of its longer-run normal

rate.

Figure 3.E provides the distribution of participants’

judgments regarding the appropriate level of the tar-

get federal funds rate at the end of each calendar year

from 2014 to 2017 and over the longer run. As noted

earlier, nearly all participants judged that economic

conditions would warrant maintaining the current

exceptionally low level of the federal funds rate into

2015. Relative to their projections in June, the

median values of the federal funds rate at the end of

2015 and 2016 increased 26 basis points and 38 basis

points to 1.38 percent and 2.88 percent, respectively,

while the mean values rose 10 basis points and

16 basis points to 1.28 percent and 2.69 percent,

respectively. The dispersion of projections for the

appropriate level of the federal funds rate was little

changed in 2015 and 2016. Most participants judged

that it would be appropriate to set the federal funds

rate at or near its longer-run normal level in 2017,

though some projected that the federal funds rate

would still need to be set appreciably below its

longer-run normal level, and one anticipated that it

would be appropriate to target a level noticeably

above its longer-run normal level. Participants pro-

vided a number of reasons why they thought it would

be appropriate for the federal funds rate to remain

below its longer-run normal level for some time after

inflation and unemployment were near mandate-

consistent levels. These reasons included an assess-

ment that headwinds holding back the recovery will

continue to exert restraint on economic activity at

that time and that the risks to the economic outlook

are asymmetric as a result of the constraints on mon-

etary policy caused by the effective lower bound on

the federal funds rate.

As in June, estimates of the longer-run level of the

federal funds rate ranged from 3.25 to about

4.25 percent. All participants judged that inflation in

the longer run would be equal to the Committee’s

inflation objective of 2 percent, implying that their

individual judgments regarding the appropriate

longer-run level of the real federal funds rate in the

absence of further shocks to the economy ranged

from 1.25 to about 2.25 percent.

Participants also described their views regarding the

appropriate path of the Federal Reserve’s balance

Minutes of Federal Open Market Committee Meetings | September 241

Figure 3.C. Distribution of participants’ projections for PCE inflation, 2014–17 and over the longer run

2014

Number of participants

1.3 1.5 1.7 1.9 2.1 2.3

- - - - - -

1.4 1.6 1.8 2.0 2.2 2.4

Percent range

September projections

June projections

2015

Number of participants

1.3 1.5 1.7 1.9 2.1 2.3

- - - - - -

1.4 1.6 1.8 2.0 2.2 2.4

Percent range

2016

Number of participants

1.3 1.5 1.7 1.9 2.1 2.3

- - - - - -

1.4 1.6 1.8 2.0 2.2 2.4

Percent range

2017

Number of participants

1.3 1.5 1.7 1.9 2.1 2.3

- - - - - -

1.4 1.6 1.8 2.0 2.2 2.4

Percent range

Longer run

Number of participants

1.3 1.5 1.7 1.9 2.1 2.3

- - - - - -

1.4 1.6 1.8 2.0 2.2 2.4

Percent range

Note: Definitions of variables are in the general note to table 1.

242 101st Annual Report | 2014

Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2014–17

2014

Number of participants

1.3 1.5 1.7 1.9 2.1 2.3

- - - - - -

1.4 1.6 1.8 2.0 2.2 2.4

Percent range

September projections

June projections

2015

Number of participants

1.3 1.5 1.7 1.9 2.1 2.3

- - - - - -

1.4 1.6 1.8 2.0 2.2 2.4

Percent range

2016

Number of participants

1.3 1.5 1.7 1.9 2.1 2.3

- - - - - -

1.4 1.6 1.8 2.0 2.2 2.4

Percent range

2017

Number of participants

1.3 1.5 1.7 1.9 2.1 2.3

- - - - - -

1.4 1.6 1.8 2.0 2.2 2.4

Percent range

Note: Definitions of variables are in the general note to table 1.

Minutes of Federal Open Market Committee Meetings | September 243

Figure 3.E. Distribution of participants’ judgments of the midpoint of the appropriate target range for the federal funds rate or

the appropriate target level for the federal funds rate, 2014–17 and over the longer run

2014

Number of participants

0.00 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13 4.38

- - - - - - - - - - - - - - - - - -

0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62

Percent range

September projections

June projections

2015

Number of participants

0.00 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13 4.38

- - - - - - - - - - - - - - - - - -

0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62

Percent range

2016

Number of participants

0.00 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13 4.38

- - - - - - - - - - - - - - - - - -

0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62

Percent range

2017

Number of participants

0.00 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13 4.38

- - - - - - - - - - - - - - - - - -

0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62

Percent range

Longer run

Number of participants

0.00 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13 4.38

- - - - - - - - - - - - - - - - - -

0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62

Percent range

Note: The midpoints of the target ranges for the federal funds rate and the target levels for the federal funds rate are measured at the end of the specified calendar year or over

the longer run.

244 101st Annual Report | 2014

sheet. Conditional on their respective economic out-

looks, all participants judged that it likely would be

appropriate to conclude asset purchases in October

of this year. A few participants thought that it would

be appropriate to begin reducing the size of the bal-

ance sheet relatively soon, with a couple of them

judging that the Committee should reduce or cease

the reinvestment of principal payments on securities

held in the Federal Reserve’s portfolio.

Participants’ views of the appropriate path for mon-

etary policy were informed by their judgments about

the state of the economy, including the values of the

unemployment rate and other labor market indica-

tors that would be consistent with maximum employ-

ment, the extent to which the economy was currently

falling short of maximum employment, the prospects

for inflation to return to the Committee’s longer-

term objective of 2 percent, the desire to minimize

potential disruption in f inancial markets, and the bal-

ance of risks around the outlook. Many participants

also mentioned the prescriptions of various mon-

etary policy rules as factors they considered in judg-

ing the appropriate path for the federal funds rate.

Uncertainty and Risks

A significant majority of participants continued to

judge the levels of uncertainty about their projections

for real GDP growth and the unemployment rate as

broadly similar to the norms during the previous

20 years (

figure 4).

Most participants continued to

judge the risks to their outlooks for real GDP growth

and the unemployment rate to be broadly balanced.

A few participants viewed the risks to real GDP

growth as weighted to the downside; one viewed the

risks as weighted to the upside. Those participants

who viewed risks as weighted to the downside cited,

for example, concern about the limited ability of

monetary policy at the effective lower bound to

respond to further negative shocks to the economy.

As in June, nearly all participants judged the risks to

the outlook for the unemployment rate to be broadly

balanced.

Participants generally saw the level of uncertainty

and the balance of risks around their forecasts for

overall PCE inflation and core inflation as little

changed from June. Most participants continued to

judge the levels of uncertainty associated with their

forecasts for the two inflation measures to be broadly

similar to historical norms, and most continued to

see the risks to those projections as broadly balanced.

Several participants, however, viewed the risks to

their inflation forecasts as tilted to the downside,

reflecting, for example, the possibility that the recent

low levels of inflation could prove more persistent

than anticipated; the possibility that the upward pull

on prices from inflation expectations might be

weaker than assumed; the current lack of inflation-

ary pressures domestically or from abroad; and the

judgment that, in current circumstances, it would be

difficult for the Committee to respond effectively to

low-inflation outcomes. Conversely, one participant

saw upside risks to inflation, citing uncertainty about

the timing and efficacy of the Committee’s with-

drawal of monetary policy accommodation.

Table 2 provides estimates of the forecast uncertainty for the

change in real GDP, the unemployment rate, and total con-

sumer price inflation over the period from 1994 through 2013.

At the end of this summary, the box “

Forecast Uncertainty”

discusses the sources and interpretation of uncertainty in the

economic forecasts and explains the approach used to assess the

uncertainty and risks attending the participants’ projections.

Table 2. Average historical projection error ranges

Percentage points

Variable 2014 2015 2016 2017

Change in real GDP

±1.3 ±1.9 ±2.1 ±2.2

Unemployment rate

±0.3 ±1.0 ±1.6 ±1.9

Total consumer prices

±0.8 ±1.0 ±1.1 ±1.0

Note: Error ranges shown are measured as plus or minus the root mean squared

error of projections for 1994 through 2013 that were released in the spring by

various private and government forecasters. As described in the box “

Forecast

Uncertainty

,” under certain assumptions, there is about a 70 percent probability

that actual outcomes for real GDP, unemployment, and consumer prices will be in

ranges implied by the average size of projection errors made in the past. For more

information, see David Reifschneider and Peter Tulip (2007), “Gauging the

Uncertainty of the Economic Outlook from Historical Forecasting Errors,” Finance

and Economics Discussion Series 2007-60 (Washington: Board of Governors of

the Federal Reserve System, November), available at

www.federalreserve.gov/

pubs/feds/2007/200760/200760abs.html

; and Board of Governors of the Federal

Reserve System, Division of Research and Statistics (2014), “Updated Historical

Forecast Errors,” memorandum, April 9,

www.federalreserve.gov/foia/files/

20140409-historical-forecast-errors.pdf

Definitions of variables are in the general note to table 1.

Measure is the overall consumer price index, the price measure that has been

most widely used in government and private economic forecasts. Projection

is percent change, fourth quarter of the previous year to the fourth quarter of

the year indicated.

Minutes of Federal Open Market Committee Meetings | September 245

Figure 4. Uncertainty and risks in economic projections

Uncertainty about GDP growth

Number of participants

Lower Broadly Higher

similar

Lower Broadly Higher

similar

Lower Broadly Higher

similar

Lower Broadly Higher

similar

September projections

June projections

Uncertainty about the unemployment rate

Uncertainty about PCE ination

Uncertainty about core PCE ination

Risks to GDP growth

Number of participants

Number of participantsNumber of participants

Weighted to Broadly Weighted to

downside balanced upside

Weighted to Broadly Weighted to

downside balanced upside

Weighted to Broadly Weighted to

downside balanced upside

Weighted to Broadly Weighted to

downside balanced upside

September projections

June projections

Risks to the unemployment rate

Risks to PCE ination

Risks to core PCE ination

Note: For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.” Definitions of variables are in the general note to table 1.

246 101st Annual Report | 2014

Forecast Uncertainty

The economic projections provided by the members

of the Board of Governors and the presidents of the

Federal Reserve Banks inform discussions of mon-

etary policy among policymakers and can aid public

understanding of the basis for policy actions. Con-

siderable uncertainty attends these projections, how-

ever. The economic and statistical models and rela-

tionships used to help produce economic forecasts

are necessarily imperfect descriptions of the real

world, and the future path of the economy can be

affected by myriad unforeseen developments and

events. Thus, in setting the stance of monetary

policy, participants consider not only what appears to

be the most likely economic outcome as embodied in

their projections, but also the range of alternative

possibilities, the likelihood of their occurring, and the

potential costs to the economy should they occur.

Table 2 summarizes the average historical accuracy

of a range of forecasts, including those reported in

past Monetary Policy Reports and those prepared by

the Federal Reserve Board’s staff in advance of

meetings of the Federal Open Market Committee.

The projection error ranges shown in the table illus-

trate the considerable uncertainty associated with

economic forecasts. For example, suppose a partici-

pant projects that real gross domestic product (GDP)

and total consumer prices will rise steadily at annual

rates of, respectively, 3 percent and 2 percent. If the

uncertainty attending those projections is similar to

that experienced in the past and the risks around the

projections are broadly balanced, the numbers

reported in table 2 would imply a probability of about

70 percent that actual GDP would expand within a

range of 1.7 to 4.3 percent in the current year, 1.1 to

4.9 percent in the second year, 0.9 to 5.1 percent in

the third year, and 0.8 to 5.2 percent in the fourth

year. The corresponding 70 percent confidence inter-

vals for overall inflation would be 1.2 to 2.8 percent in

the current year, 1.0 to 3.0 percent in the second

year, 0.9 to 3.1 percent in the third year, and 1.0 to

3.0 percent in the fourth year.

Because current conditions may differ from those

that prevailed, on average, over history, participants

provide judgments as to whether the uncertainty

attached to their projections of each variable is

greater than, smaller than, or broadly similar to typi-

cal levels of forecast uncertainty in the past, as

shown in table 2. Participants also provide judgments

as to whether the risks to their projections are

weighted to the upside, are weighted to the down-

side, or are broadly balanced. That is, participants

judge whether each variable is more likely to be

above or below their projections of the most likely

outcome. These judgments about the uncertainty

and the risks attending each participant’s projections

are distinct from the diversity of participants’ views

about the most likely outcomes. Forecast uncertainty

is concerned with the risks associated with a particu-

lar projection rather than with divergences across a

number of different projections.

As with real activity and inflation, the outlook for the

future path of the federal funds rate is subject to con-

siderable uncertainty. This uncertainty arises primarily

because each participant’s assessment of the appro-

priate stance of monetary policy depends importantly

on the evolution of real activity and inflation over

time. If economic conditions evolve in an unexpected

manner, then assessments of the appropriate setting

of the federal funds rate would change from that

point forward.

Minutes of Federal Open Market Committee Meetings | September 247

Meeting Held

on October 28–29, 2014

A meeting of the Federal Open Market Committee

was held in the offices of the Board of Governors of

the Federal Reserve System in Washington, D.C., on

Tuesday, October 28, 2014, at 1:00 p.m. and contin-

ued on Wednesday, October 29, 2014, at 9:00 a.m.

Present

Janet L. Yellen

Chair

William C. Dudley

Vice Chairman

Lael Brainard

Stanley Fischer

Richard W. Fisher

Narayana Kocherlakota

Loretta J. Mester

Charles I. Plosser

Jerome H. Powell

Daniel K. Tarullo

Christine Cumming, Charles L. Evans,

Jeffrey M. Lacker, Dennis P. Lockhart,

and John C. Williams

Alternate Members of the Federal Open Market

Committee

James Bullard, Esther L. George,

and Eric Rosengren

Presidents of the Federal Reserve Banks of St. Louis,

Kansas City, and Boston, respectively

William B. English

Secretary and Economist

Matthew M. Luecke

Deputy Secretary

Michelle A. Smith

Assistant Secretary

Scott G. Alvarez

General Counsel

Thomas C. Baxter

Deputy General Counsel

Steven B. Kamin

Economist

David W. Wilcox

Economist

James A. Clouse, Thomas A. Connors,

Evan F. Koenig, Thomas Laubach,

Samuel Schulhofer-Wohl, and William Wascher

Associate Economists

Simon Potter

Manager, System Open Market Account

Lorie K. Logan

Deputy Manager, System Open Market Account

Robert deV. Frierson

Secretary of the Board, Office of the Secretary,

Board of Governors

Michael S. Gibson

Director, Division of Banking Supervision and

Regulation, Board of Governors

Nellie Liang

Director, Office of Financial Stability Policy and

Research, Board of Governors

Stephen A. Meyer and William R. Nelson

Deputy Directors, Division of Monetary Affairs,

Board of Governors

Andrew Figura, David Reifschneider,

and Stacey Tevlin

Special Advisers to the Board, Office of Board

Members, Board of Governors

Trevor A. Reeve

Special Adviser to the Chair, Office of Board

Members, Board of Governors

Linda Robertson

Assistant to the Board, Office of Board Members,

Board of Governors

Christopher J. Erceg

Senior Associate Director, Division of International

Finance, Board of Governors

Ellen E. Meade and Joyce K. Zickler

Senior Advisers, Division of Monetary Affairs,

Board of Governors

Eric M. Engen and David E. Lebow

Associate Directors, Division of Research and

Statistics, Board of Governors

Fabio M. Natalucci

Associate Director, Division of Monetary Affairs,

Board of Governors

Attended the joint session of the Federal Open Market Com-

mittee and the Board of Governors.

248 101st Annual Report | 2014

Joseph W. Gruber

Deputy Associate Director, Division of International

Finance, Board of Governors

John J. Stevens

Deputy Associate Director, Division of Research and

Statistics, Board of Governors

Steven A. Sharpe

Assistant Director, Division of Research and

Statistics, Board of Governors

Patrick E. McCabe

Adviser, Division of Research and Statistics,

Board of Governors

Robert J. Tetlow

Adviser, Division of Monetary Affairs,

Board of Governors

Penelope A. Beattie

Assistant to the Secretary, Office of the Secretary,

Board of Governors

Christopher J. Gust

Section Chief, Division of Monetary Affairs,

Board of Governors

David H. Small

Project Manager, Division of Monetary Affairs,

Board of Governors

Katie Ross

Manager, Office of the Secretary,

Board of Governors

Canlin Li

Senior Economist, Division of Monetary Affairs,

Board of Governors

Randall A. Williams

Records Project Manager, Division of Monetary

Affairs, Board of Governors

Helen E. Holcomb

First Vice President, Federal Reserve Bank of Dallas

David Altig, Jeff Fuhrer, James J.

McAndrews, and Glenn D. Rudebusch

Executive Vice Presidents, Federal Reserve Banks of

Atlanta, Boston, New York, and San Francisco,

respectively

Troy Davig, Michael Dotsey, Joshua L. Frost,

Spencer Krane, and Christopher J. Waller

Senior Vice Presidents, Federal Reserve Banks of

Kansas City, Philadelphia, New York, Chicago, and

St. Louis, respectively

Todd E. Clark and Douglas Tillett

Vice Presidents, Federal Reserve Banks of Cleveland

and Chicago, respectively

Andreas L. Hornstein

Senior Advisor, Federal Reserve Bank of Richmond

Developments in Financial Markets and

the Federal Reserve’s Balance Sheet

In a joint session of the Federal Open Market Com-

mittee (FOMC) and the Board of Governors of the

Federal Reserve System, the deputy manager of the

System Open Market Account (SOMA) reported on

developments in domestic and foreign financial mar-

kets as well as System open market operations con-

ducted during the period since the Committee met on

September 16–17, 2014. In addition, the deputy man-

ager summarized the outcomes of recent test opera-

tions of the Term Deposit Facility, described the

results from the overnight reverse repurchase agree-

ment (ON RRP) operational exercise, and reviewed

the implications of recent foreign central bank policy

actions for the international portion of the SOMA

portfolio. The SOMA manager then discussed the

Open Market Desk’s plans for modestly expanding

the list of counterparties eligible to participate in ON

RRP operations based on substantially the same cri-

teria established in the past for such counterparties.

The manager also described ongoing staff work on

improving data collections regarding bank funding

markets and possibly using those data to provide

more robust measures of bank funding rates. Finally,

the manager reported on potential arrangements that

would allow depository institutions to pledge funds

held in a segregated account at the Federal Reserve as

collateral in borrowing transactions with private

creditors and would provide an additional supple-

mentary tool during policy normalization; the man-

ager noted possible next steps that the staff could

potentially undertake to investigate the issues related

to such arrangements.

Next, the staff outlined two proposals that the Com-

mittee could consider for further testing of RRP

operations. In the first proposal, the Desk would vary

by modest amounts the interest rate on ON RRP

operations according to a preannounced schedule.

Varying the spread between the ON RRP rate and

Attended the portion of the meeting following the joint session

of the Federal Open Market Committee and the Board of

Governors.

Attended the discussion of longer-run goals and monetary

policy strategy.

Minutes of Federal Open Market Committee Meetings | October 249

the interest on excess reserves rate could provide the

Committee with information about the effect of that

spread on money markets and the demand for ON

RRP. In addition, changes in the ON RRP rate

would provide further information about the effec-

tiveness of an ON RRP facility in providing a floor

for money market rates during policy normalization.

In the second proposal, the Desk would conduct a

series of preannounced term RRP operations that

would extend across the end of the year. In their dis-

cussion of term RRP testing, participants noted that

the testing could provide information about the

potential effectiveness of another of the Committee’s

supplementary policy tools and would help address

expected downward pressures on short-term rates at

year-end. But it was also noted that by conducting

the term RRPs, the Committee would be losing infor-

mation on how market participants might adjust and

make investment arrangements prior to year-end

with only the $300 billion in ON RRP available. One

participant commented that the downward pressure

on rates at year-end might be more directly addressed

by raising the overall size limit on the ON RRP exer-

cise. However, it was emphasized that increasing the

cap on ON RRP operations at year-end could raise

the risks for financial markets that had led the

FOMC to impose the cap; these concerns were seen

as less pronounced with a temporary program of

term RRP operations. It was also noted that the pro-

posed term RRP operations were only a test and that

the Committee had not yet decided the conditions

under which such operations would be used in the

future.

Following the discussion of the testing of RRP

operations, the Committee unanimously approved

the following resolution on the ON RRP exercise:

“The Federal Open Market Committee (FOMC)

modifies the authorization concerning overnight

reverse repurchase operations adopted at the

September 17, 2014, FOMC meeting as follows:

(i) The offering rate of the operations may vary

from zero to ten basis points.

This modification shall be effective beginning

with the operation conducted on November 3,

2014, and conclude with the operation con-

ducted on December 12, 2014.”

By unanimous vote, the Committee approved the fol-

lowing resolution on term RRP operations:

“During the period of December 1, 2014, to

December 30, 2014, the Federal Open Market

Committee (FOMC) authorizes the Federal

Reserve Bank of New York to conduct a series

of term reverse repurchase operations involving

U.S. Government securities. Such operations

shall: (i) mature no later than January 5, 2015;

(ii) be subject to an overall size limit of $300 bil-

lion outstanding at any one time; (iii) be subject

to a maximum bid rate of ten basis points;

(iv) be awarded to all submitters: (A) at the high-

est submitted rate if the sum of the bids received

is less than or equal to the preannounced size of

the operation, or (B) at the stopout rate, deter-

mined by evaluating bids in ascending order by

submitted rate up to the point at which the total

quantity of bids equals the preannounced size of

the operation, with all bids below this rate

awarded in full at the stopout rate and all bids at

the stopout rate awarded on a pro rata basis, if

the sum of the counterparty offers received is

greater than the preannounced size of the opera-

tion. Such operations may be for forward settle-

ment. The System Open Market Account man-

ager will inform the FOMC in advance of the

terms of the planned operations. The Chair

must approve the terms of, timing of the

announcement of, and timing of the operations.

These operations shall be conducted in addition

to the authorized overnight reverse repurchase

agreements, which remain subject to a separate

overall size limit of $300 billion per day.”

By unanimous vote, the Committee ratified the

Desk’s domestic transactions over the intermeeting

period. There were no intervention operations in for-

eign currencies for the System’s account over the

intermeeting period.

The Board meeting concluded at the end of the dis-

cussion of developments in financial markets and the

Federal Reserve’s balance sheet.

Staff Review of the Economic Situation

The information reviewed for the October 28–29

meeting indicated that economic activity expanded at

a moderate pace in the third quarter and that labor

market conditions improved over the intermeeting

period. Consumer price inflation continued to run

below the FOMC’s longer-run objective of 2 percent.

Following the conclusion of the meeting, the Desk released a

statement outlining the planned ON RRP and term RRP

exercises.

250 101st Annual Report | 2014

Market-based measures of inflation compensation

declined somewhat, while survey-based measures of

longer-term inflation expectations remained stable.

Total nonfarm payroll employment rose in Septem-

ber and the gains for July and August were revised

up, leaving the average increase in the third quarter

similar to that for the first half of the year. In Sep-

tember, the unemployment rate declined to 5.9 per-

cent, and the share of workers employed part time

for economic reasons decreased a little. The labor

force participation rate edged down, and the

employment-to-population ratio remained essentially

unchanged. Other indicators generally suggested a

continued improvement in labor market conditions.

Although the rate of gross private-sector hiring

declined, the rate of job openings moved up, meas-

ures of firms’ hiring plans increased, initial claims for

unemployment insurance remained low, and some

measures of household expectations for labor market

conditions improved.

Industrial production increased briskly in September

after having been little changed, on net, over the first

two months of the quarter, and the rate of capacity

utilization in the manufacturing sector moved up.

Readings on new orders from the national and

regional manufacturing surveys were generally con-

sistent with moderate near-term increases in factory

output, but automakers’ production schedules for the

fourth quarter pointed to some slowing in the pace of

motor vehicle assemblies.

Real personal consumption expenditures (PCE)

appeared to have increased at a modest pace in the

third quarter. The components of the nominal retail

sales data used by the Bureau of Economic Analysis

to construct its estimates of PCE were, in total, little

changed in September following solid gains in July

and August. In addition, sales of light motor vehicles

fell back in September following a steep increase in

August. Recent data on factors that tend to support

household spending were mixed. Real disposable

income continued to increase in August, and con-

sumer sentiment as measured by the Thomson

Reuters/University of Michigan Surveys of Consum-

ers improved in September and early October. In

contrast, household net worth likely decreased

because of a decline in equity prices.

Housing market conditions seemed to be improving

only slowly. Starts and permits of single-family

homes were little changed, on net, in recent months.

New home sales were flat in September after moving

up in August, and sales of existing single-family

homes moved essentially sideways over the past sev-

eral months.

Real spending on business equipment and intellectual

property products appeared to have risen at a moder-

ate pace in the third quarter. Nominal shipments of

nondefense capital goods excluding aircraft were

little changed, on net, in August and September after

a solid increase in July. New orders for these capital

goods declined in September but remained above the

level of shipments, indicating that shipments may

increase further in subsequent months. Other

forward-looking indicators, such as national and

regional surveys of business conditions, were gener-

ally consistent with moderate gains in business equip-

ment spending in the near term. Nominal business

spending for new nonresidential construction

decreased in August, and vacancy rates for nonresi-

dential buildings remained elevated. Meanwhile,

inventories in most industries were about in line with

sales; in the energy sector, inventories appeared some-

what lean despite substantial stockbuilding since ear-

lier in the year.

Total real government purchases appeared to have

risen modestly in the third quarter. Federal govern-

ment purchases likely increased, as nominal defense

spending was higher in the third quarter than in the

second quarter. In addition, real state and local gov-

ernment purchases probably rose somewhat, as the

payrolls of these governments expanded and their

nominal construction expenditures increased during

the third quarter.

The U.S. international trade deficit narrowed slightly

in August. Following large increases in July, both

exports and imports grew only modestly, with gains

concentrated in capital goods excluding automotive

products.

Total U.S. consumer price inflation, as measured by

the PCE price index, was about 1½ percent over the

12 months ending in August. Over the 12 months

ending in September, both the consumer price index

(CPI) and the CPI excluding food and energy prices

rose about 1¾ percent. Consumer energy prices

declined further in September, largely ref lecting con-

tinued declines in retail gasoline prices, and survey

data suggested gasoline prices fell further over the

first few weeks of October. Consumer food prices

rose solidly in recent months. Near-term inflation

expectations from the Michigan survey declined in

September and early October, while longer-term

Minutes of Federal Open Market Committee Meetings | October 251

inflation expectations in the survey were little

changed.

Foreign economies appeared to have continued to

expand at a moderate rate in the third quarter,

although with considerable divergence across coun-

tries. In Japan, consumption staged a mild rebound

after contracting in the previous quarter in response

to a tax increase, while indicators for the euro area

pointed to only continued sluggish growth. Third-

quarter growth in real gross domestic product (GDP)

remained healthy in the United Kingdom, and indi-

cators for Canada also were positive. Among emerg-

ing market economies, GDP growth remained strong

in the third quarter in China and Korea and indica-

tors for Mexico were favorable as well. The Brazilian

economy appeared to be stabilizing. Foreign inflation

remained generally subdued and in some regions

quite low, especially in the euro area, where headline

inflation was well below 1 percent.

Staff Review of the Financial Situation

Concerns about the global economic outlook appar-

ently helped to prompt a sharp pullback from risky

assets in the United States, but prices of those assets

subsequently reversed much of their declines by the

end of the intermeeting period. In addition, a num-

ber of technical factors reportedly contributed to

volatile interest rate moves in mid-October. Worries

about a possible spread of Ebola also appeared to

weigh on market sentiment somewhat at times. On

net, yields on longer-term Treasury securities fell

notably, U.S. equity prices edged down, corporate

bond spreads widened modestly, and the dollar

appreciated moderately against most other

currencies.

Federal Reserve communications were reportedly

viewed as slightly more accommodative than antici-

pated, on balance. The expected path of the federal

funds rate implied by market quotes shifted down

notably, on net, over the period. Market-based meas-

ures suggested that the expected date of the first

increase in the federal funds rate was pushed out

from the third quarter of 2015 to late 2015. However,

the results from the Desk’s October Survey of Pri-

mary Dealers indicated that the dealers’ projected

path of the federal funds rate was little changed from

the September survey, with dealers continuing to see

the middle of next year as the most likely time of

liftoff.

The Treasury market experienced significant volatil-

ity on October 15, with 5- and 10-year Treasury

yields dropping as much as 30 basis points in about

an hour before retracing much of those moves by the

end of the day. Amid very high trading volumes,

Treasury market liquidity, as measured by bid–asked

spreads, worsened significantly, and measures of the

implied volatility of longer-term rates jumped on the

day but subsequently fell back. While the release of

the somewhat weaker-than-expected data for Septem-

ber U.S. retail sales was seen as the trigger for these

sharp movements, market participants indicated that

a number of technical factors related to investor posi-

tioning and trading strategies likely amplified the

swing in interest rates.

Over the intermeeting period as a whole, longer-term

nominal Treasury yields declined about 30 basis

points. Market-based measures of inflation compen-

sation moved lower as well, extending the declines

seen since the summer. The decline in inflation com-

pensation reportedly reflected in part concerns about

global growth and the risk of building disinflationary

pressures, the lower-than-expected August CPI

report, the decline in oil prices, and the appreciation

of the U.S. dollar. Yields on agency mortgage-backed

securities (MBS) declined roughly in line with com-

parable Treasury yields, while spreads on both

investment- and speculative-grade corporate bonds

widened modestly relative to Treasury securities.

The S&P 500 index decreased about 1 percent, on

net, over the intermeeting period. Option-implied

volatility for the S&P 500 index over the next month

increased moderately, on balance, ending the period

below its long-run historical average, though during

the mid-October volatility spike, it briefly touched

high levels last seen in 2011. About half of the firms

in the S&P 500 index reported earnings for the third

quarter, with the reports generally viewed as positive.

Overall, third-quarter earnings estimates continued

to imply modest growth in earnings per share com-

pared with the previous quarter.

Despite some volatility related to quarter-end, condi-

tions in unsecured funding markets were little

changed, on net, over the intermeeting period. In

secured funding markets, some money market rates

fell in the days leading up to quarter-end, reportedly

reflecting in part the announcement of the $300 bil-

lion overall size limit on the ON RRP exercise follow-

ing the September FOMC meeting. After quarter-

252 101st Annual Report | 2014

end, however, short-term rates generally moved back

toward their preannouncement levels.

Credit flows to nonfinancial business picked up in

September and early October. Gross issuance of

investment- and speculative-grade bonds rebounded

from seasonal lows over the summer, notwithstand-

ing the slowdown during the mid-October market

volatility spike. Commercial and industrial loans on

banks’ books continued to expand at a robust pace in

the third quarter, consistent with the strong demand

from large and middle-market firms reported in the

October Senior Loan Officer Opinion Survey on

Bank Lending Practices (SLOOS). In the leveraged

loan market, institutional issuance slowed some in

September, though investors’ interest in the asset

class remained strong.

Financing conditions in the commercial real estate

(CRE) market continued to ease. According to the

October SLOOS, banks eased CRE lending stan-

dards, on net, and reported stronger demand for such

loans. Growth of CRE loans on the balance sheets of

large banks slowed in the third quarter, while growth

at small banks remained moderate. Issuance of com-

mercial mortgage-backed securities stayed robust in

September.

Over the intermeeting period, mortgage rates to

qualified borrowers declined about 25 basis points.

The decline in rates coincided with an appreciable

increase in the volume of refinancing activity. Mort-

gage lending conditions were little changed on net.

Conditions in most consumer credit markets

remained accommodative during the third quarter.

Auto loans continued to be widely available, and

respondents to the October SLOOS indicated that

demand for auto loans had strengthened further in

the third quarter. In addition, demand for credit card

loans increased, and a few large banks reported hav-

ing eased lending policies on such loans.

As in the United States, participants in foreign finan-

cial markets became more concerned, on balance,

about prospects for global economic growth. On net

over the period, equity indexes were down in most

advanced and emerging market economies, and

measures of implied volatility rose. Benchmark sov-

ereign yields fell sharply, with German yields reach-

ing record lows. Expected policy rate paths moved

down in most advanced economies, and market-

based measures of inflation compensation continued

to decline. The Riksbank unexpectedly cut its main

policy rate to zero in response to the low level of

Swedish inflation. Spreads on peripheral European

sovereign bonds increased, modestly for most coun-

tries but more substantially for Greek bonds, reflect-

ing, in part, market concerns that Greece might exit

its International Monetary Fund program prema-

turely. Spreads on emerging market bonds generally

edged higher. In addition, the broad nominal dollar

index ended the period moderately higher.

The European Central Bank released the results of

the 2014 comprehensive assessment, which included

both an asset quality review and a forward-looking

stress test. Under the stress test, which recognizes

capital raising and balance sheet adjustments through

September 2014, 13 banks were identified as needing

to strengthen their capital positions and 8 will be

required to raise net new capital. The results were

broadly in line with expectations, and the market

reaction to the release was limited.

The staff’s periodic report on potential risks to finan-

cial stability noted that recent developments in finan-

cial markets highlighted the potential for shocks to

trigger increases in market volatility and declines in

asset prices that could undermine financial stability.

Nevertheless, the U.S. financial system appeared

resilient to shocks of the magnitude seen recently due

to the relatively strong capital and liquidity profiles

of large domestic banking firms, subdued aggregate

leverage in the nonfinancial sector, and relatively

restrained use of short-term wholesale funding across

the financial sector. However, the staff report also

pointed to asset valuation pressures that were broad-

ening, as well as a loosening of underwriting stan-

dards in the speculative corporate debt and CRE

markets; it noted the need to closely monitor these

developments going forward.

Staff Economic Outlook

The information on economic activity received since

the staff prepared its forecast for the September

FOMC meeting was close to expectations, and there-

fore, the staff’s projection for real GDP growth over

the remainder of the year was little revised. However,

in response to a further rise in the foreign exchange

value of the dollar, a deterioration in global growth

prospects, and a decline in equity prices, the staff

revised down its projection for real GDP growth a

little over the medium term. Even with the slower

expansion of economic activity in this projection,

real GDP was still expected to rise faster than poten-

tial output in 2015 and 2016, supported by accom-

Minutes of Federal Open Market Committee Meetings | October 253

modative monetary policy and a further easing of the

restraint on spending from changes in fiscal policy; in

2017, real GDP growth was projected to step down

toward the rate of potential output growth. As a

result, resource slack was anticipated to decline

steadily, albeit at a slightly slower rate than in the

previous projection, and the unemployment rate was

expected to gradually improve and to be at the staff’s

estimate of its longer-run natural rate in 2017.

The staff’s forecast for inflation this quarter and

early next year was reduced in response to further

declines in crude oil prices, but the forecast for infla-

tion over the medium term was only a touch lower.

Consumer price inflation was projected to be lower in

the second half of this year than in the first half and

to remain below the Committee’s longer-run objec-

tive of 2 percent over the next few years. With

resource slack projected to diminish slowly and

changes in commodity and import prices anticipated

to be subdued, inflation was projected to rise gradu-

ally and to reach the Committee’s objective in the

longer run.

The staff continued to view the uncertainty around

its projections for real GDP growth, the unemploy-

ment rate, and inflation as similar to the average over

the past 20 years. The risks to the forecast for real

GDP growth and inflation were seen as tilted to the

downside, reflecting recent financial developments

and concerns about the foreign economic outlook, as

well as the staff’s assessment that neither monetary

policy nor fiscal policy appeared well positioned to

help the economy withstand adverse shocks. At the

same time, the staff continued to view the risks

around its outlook for the unemployment rate as

roughly balanced.

Participants’ Views on Current Conditions

and the Economic Outlook

In their discussion of the economic situation and the

outlook, most meeting participants viewed the infor-

mation received over the intermeeting period as sug-

gesting that economic activity continued to expand at

a moderate pace. Labor market conditions improved

somewhat further, with solid job gains and a lower

unemployment rate; on balance, participants judged

that the underutilization of labor resources was

gradually diminishing. Participants generally

expected that, over the medium term, real economic

activity would increase at a pace sufficient to lead to

a further gradual decline in the unemployment rate

toward levels consistent with the Committee’s objec-

tive of maximum employment. Inflation was continu-

ing to run below the Committee’s longer-run objec-

tive. Market-based measures of inflation compensa-

tion declined somewhat, while survey-based measures

of longer-term inflation expectations remained

stable. Participants anticipated that inflation would

be held down over the near term by the decline in

energy prices and other factors, but would move

toward the Committee’s 2 percent goal in coming

years, although a few expressed concern that inflation

might persist below the Committee’s objective for

quite some time. Most viewed the risks to the out-

look for economic activity and the labor market as

nearly balanced. However, a number of participants

noted that economic growth over the medium term

might be slower than they currently expected if the

foreign economic or financial situation deteriorated

significantly.

Household spending advanced at a moderate pace

over the intermeeting period, and reports from con-

tacts in several parts of the country indicated that

recent retail or auto sales had been robust. However,

one participant pointed to mixed retail sales reports

that likely reflected a continuation of restrained dis-

cretionary spending on the part of low- and middle-

income households. Many participants judged that

the recent significant decline in energy prices would

provide a boost to consumer spending over the near

term, with several of them noting that the drop in

gasoline prices would benefit lower-income house-

holds in particular. Among the other favorable fac-

tors that were expected to support continued growth

in consumer spending, participants cited solid gains

in payroll employment, low interest rates, rising con-

sumer confidence, and the decline in levels of house-

hold debt relative to income.

The recovery in the housing sector remained slow

despite low interest rates and some recent improve-

ment in the availability of mortgage credit. Contacts

in some parts of the country reported continued

weakness in single-family construction, while in other

regions activity reportedly was picking up gradually

following a sluggish summer. A few participants

pointed to continued strong growth in multifamily

construction, although the limited pipeline of new

projects in one District suggested that activity could

slow in 2015.

Reports from business contacts in many parts of the

country pointed to an improvement in business con-

ditions, with indexes of the manufacturing sector

posting broad-based gains in recent months in a

254 101st Annual Report | 2014

number of Districts. A couple of participants

reported expectations of a robust holiday sales sea-

son based on accumulating inventories of consumer

goods or an increase in e-commerce traffic and

related transportation activity. Contacts in several

regions reported ready availability of credit, strong

loan growth, or a steady increase in commercial con-

struction activity. While the fall in energy prices was

generally regarded as a positive development for

many businesses, it was noted that a sustained drop

in prices would have effects on oil drilling and related

investment activity. In the agricultural sector, the

robust fall harvest had driven down crop prices; food

processing and farm equipment businesses were slow-

ing as a result of lower farm income and a drop in

exports.

In discussing economic developments abroad, par-

ticipants pointed to a somewhat weaker economic

outlook and increased downside risks in Europe,

China, and Japan, as well as to the strengthening of

the dollar over the period. It was observed that if for-

eign economic or financial conditions deteriorated

further, U.S. economic growth over the medium term

might be slower than currently expected. However,

many participants saw the effects of recent develop-

ments on the domestic economy as likely to be quite

limited. These participants suggested variously that

the share of external trade in the U.S. economy is

relatively small, that the effects of changes in the

value of the dollar on net exports are modest, that

shifts in the structure of U.S. trade and production

over time may have reduced the effects on U.S. trade

of developments like those seen of late, or that the

slowdown in external demand would likely prove to

be less severe than initially feared. Several partici-

pants judged that the decline in the prices of energy

and other commodities as well as lower long-term

interest rates would likely provide an offset to the

higher dollar and weaker foreign growth, or that the

domestic recovery remained on a firm footing.

Indicators of labor market conditions continued to

improve over the intermeeting period, with a further

reduction in the unemployment rate, declines in

longer-duration unemployment, strong growth in

payroll employment, and a low level of initial claims

for unemployment insurance. Business contacts

reported employment gains in several parts of the

country, with relatively few pointing to emerging

wage pressures, although one participant indicated

that larger wage gains had been accruing to some

individuals who switched jobs. Labor market condi-

tions indexes constructed from a broad set of indica-

tors suggested that the underutilization of labor had

continued to diminish, although a number of partici-

pants noted that underutilization of labor market

resources remained. A couple of participants judged

that the large number of individuals working part

time for economic reasons and the continued drift

down in the labor force participation rate suggested

that the unemployment rate was understating the

degree of labor market underutilization.

Most participants anticipated that inflation was

likely to edge lower in the near term, reflecting the

decline in oil and other commodity prices and lower

import prices. These participants continued to expect

inflation to move back to the Committee’s 2 percent

target over the medium term as resource slack dimin-

ished in an environment of well-anchored inflation

expectations, although a few of them thought the

return to 2 percent might be quite gradual. Survey-

based measures of inflation expectations remained

well anchored, but market-based measures of infla-

tion compensation over the next five years as well as

over the f ive-year period beginning five years ahead

had declined over the intermeeting period. Various

explanations were offered for the decline in the

market-based measures, and participants expressed

different views about how to interpret these recent

movements. The explanations included a decline in

inflation risk premiums, possibly reflecting a lower

perceived probability of higher inflation outcomes;

and special factors, including liquidity risk premiums,

that might be influencing the pricing of Treasury

Inflation-Protected Securities and inflation deriva-

tives. One participant noted that even if the declines

reflected lower inflation risk premiums and not a

reduction in expected inflation, policymakers might

still want to take them into account because such a

change could reflect increased concerns on the part

of investors about adverse outcomes in which low

inflation was accompanied by weak economic activ-

ity. A couple of participants noted that it was likely

too early to draw conclusions regarding these devel-

opments, especially in light of the recent market vola-

tility. However, many participants observed that the

Committee should remain attentive to evidence of a

possible downward shift in longer-term inflation

expectations; some of them noted that if such an

outcome occurred, it would be even more worrisome

if growth faltered.

In their discussion of financial market developments

and financial stability issues, participants judged that

the movements in the prices of stocks, bonds, com-

modities, and the U.S. dollar over the intermeeting

Minutes of Federal Open Market Committee Meetings | October 255

period appeared to have been driven primarily by

concerns about prospects for foreign economic

growth. Many participants commented on the turbu-

lence in financial markets that occurred in mid-

October. Some participants pointed out that, despite

the market volatility, financial conditions remained

highly accommodative and that further pockets of

turbulence were likely to arise as the start of policy

normalization approached. That said, more work to

better understand the recent market dynamics was

seen as desirable. In addition, a couple of partici-

pants noted the potential usefulness of collecting

additional data on wholesale funding markets in

order to better understand how changes in interest

rates could influence those markets.

In their discussion of communications regarding the

path of the federal funds rate over the medium term,

meeting participants agreed that the timing of the

first increase in the federal funds rate and the appro-

priate path of the policy rate thereafter would

depend on incoming economic data and their impli-

cations for the outlook. Most participants judged

that it would be helpful to include new language in

the Committee’s forward guidance to clarify how the

Committee’s decision about when to begin the policy

normalization process will depend on incoming infor-

mation about the economy. Some participants pre-

ferred to eliminate language in the statement indicat-

ing that the current target range for the federal funds

rate would likely be maintained for a “considerable

time” after the end of the asset purchase program.

These participants were concerned that such a char-

acterization could be misinterpreted as suggesting

that the Committee’s decisions would not depend on

the incoming data. However, other participants

thought that the “considerable time” phrase was use-

ful in communicating the Committee’s policy inten-

tions or that additional wording could be used to

emphasize the data-dependence of the Committee’s

decision process. A couple of them noted that the

removal of the “considerable time” phrase might be

seen as signaling a significant shift in the stance of

policy, potentially resulting in an unintended tighten-

ing of financial conditions. A couple of others

thought that the current forward guidance might be

read as suggesting an earlier date of liftoff than was

likely to prove appropriate, given the outlook for

inflation and the downside risks to the economy

associated with the effective lower bound on interest

rates. With regard to the pace of interest rate

increases after the start of policy normalization, a

number of participants thought that it could soon be

helpful to clarify the Committee’s likely approach. It

was noted that communication about post-liftoff

policy would pose challenges given the inherent

uncertainty of the economic and financial outlook

and the Committee’s desire to retain flexibility to

adjust policy in response to the incoming data. Most

participants supported retaining the language in the

statement indicating that the Committee anticipates

that economic conditions may warrant keeping the

target range for the federal funds rate below longer-

run normal levels even after employment and infla-

tion are near mandate-consistent levels. However, a

couple of participants thought that the language

should be amended in light of the prescriptions sug-

gested by many monetary policy rules and the risks

associated with keeping interest rates below their

longer-run values for an extended period of time.

Committee Policy Action

In their discussion of monetary policy for the period

ahead, members judged that information received

since the FOMC met in September indicated that

economic activity was expanding at a moderate pace.

Labor market conditions had improved somewhat

further, with solid job gains and a lower unemploy-

ment rate; on balance, a range of indicators sug-

gested that underutilization of labor resources was

gradually diminishing. Household spending was ris-

ing moderately and business fixed investment was

advancing, while the recovery in the housing sector

remained slow. Inflation had continued to run below

the Committee’s longer-run objective. Market-based

measures of inflation compensation had declined

somewhat, but survey-based measures of longer-term

inflation expectations had remained stable. The Com-

mittee expected that, with appropriate policy accom-

modation, economic activity would expand at a mod-

erate pace, with labor market indicators and inflation

moving toward levels the Committee judges consis-

tent with its dual mandate.

In their discussion of language for the post-meeting

statement, a number of members judged that, while

some underutilization in the labor market remained,

it appeared to be gradually diminishing. In addition,

members considered the advantages and disadvan-

tages of adding language to the statement to

acknowledge recent developments in financial mar-

kets. On the one hand, including a reference would

show that the Committee was monitoring financial

developments while also providing an opportunity to

note that financial conditions remained highly sup-

portive of growth. On the other hand, including a

reference risked the possibility of suggesting greater

256 101st Annual Report | 2014

concern on the part of the Committee than was actu-

ally the case, perhaps leading to the misimpression

that monetary policy was likely to respond to

increases in volatility. In the end, the Committee

decided not to include such a reference. Finally, a

couple of members suggested including language in

the statement indicating that recent foreign economic

developments had increased uncertainty or had

boosted downside risks to the U.S. economic out-

look, but participants generally judged that such

wording would suggest greater pessimism about the

economic outlook than they thought appropriate.

In their discussion of the asset purchase program,

members generally agreed that the condition articu-

lated by the Committee when it began the program in

September 2012 had been achieved—that is, there

had been a substantial improvement in the outlook

for the labor market—and that there was sufficient

underlying strength in the broader economy to sup-

port ongoing progress toward maximum employment

in a context of price stability. Accordingly, all mem-

bers but one supported concluding the Committee’s

asset purchase program at the end of October and

maintaining its existing policy of reinvesting princi-

pal payments from its holdings of agency debt and

agency MBS in agency MBS and of rolling over

maturing Treasury securities at auction. By keeping

the Committee’s holdings of longer-term securities at

sizable levels, this policy was expected to help main-

tain accommodative financial conditions.

In addition, the Committee agreed to maintain the

target range for the federal funds rate at 0 to ¼ per-

cent and to reaffirm the indication in the statement

that the Committee’s decision about how long to

maintain the current target range for the federal

funds rate would depend on its assessment of actual

and expected progress toward its objectives of maxi-

mum employment and 2 percent inflation. All but

one member agreed that the Committee should reit-

erate the expectation that it likely would be appropri-

ate to maintain the current target range for the fed-

eral funds rate for a considerable time following the

end of the asset purchase program in October, espe-

cially if projected inflation continued to run below

the Committee’s 2 percent longer-run goal, and pro-

vided that longer-term inflation expectations

remained well anchored. The one member thought

that the Committee should instead strengthen the

forward guidance in order to underscore the Com-

mittee’s commitment to its 2 percent inflation objec-

tive. The Committee agreed to include additional

wording in the statement in order to emphasize that

the Committee’s decision on the timing of the first

increase in the federal funds rate would be data

dependent. In particular, the statement would say

that, if incoming information indicated faster prog-

ress toward the Committee’s employment and infla-

tion objectives than the Committee now expects, then

increases in the target range for the federal funds rate

would likely occur sooner than currently anticipated.

It would also note that, if progress proves slower

than expected, then increases in the target range

would likely occur later than currently anticipated.

The Committee also agreed to reiterate its expecta-

tion that, even after employment and inflation are

near mandate-consistent levels, economic conditions

may, for some time, warrant keeping the target fed-

eral funds rate below levels the Committee views as

normal in the longer run.

At the conclusion of the discussion, the Committee

voted to authorize and direct the Federal Reserve

Bank of New York, until it was instructed otherwise,

to execute transactions in the SOMA in accordance

with the following domestic policy directive:

“Consistent with its statutory mandate, the Fed-

eral Open Market Committee seeks monetary

and financial conditions that will foster maxi-

mum employment and price stability. In particu-

lar, the Committee seeks conditions in reserve

markets consistent with federal funds trading in

a range from 0 to ¼ percent. The Committee

directs the Desk to undertake open market

operations as necessary to maintain such condi-

tions. The Desk is directed to conclude the cur-

rent program of purchases of longer-term Treas-

ury securities and agency mortgage-backed secu-

rities by the end of October. The Committee

directs the Desk to maintain its policy of rolling

over maturing Treasury securities into new

issues and its policy of reinvesting principal pay-

ments on all agency debt and agency mortgage-

backed securities in agency mortgage-backed

securities. The Committee also directs the Desk

to engage in dollar roll and coupon swap trans-

actions as necessary to facilitate settlement of

the Federal Reserve’s agency mortgage-backed

securities transactions. The System Open Mar-

ket Account manager and the secretary will keep

the Committee informed of ongoing develop-

ments regarding the System’s balance sheet that

Minutes of Federal Open Market Committee Meetings | October 257

could affect the attainment over time of the

Committee’s objectives of maximum employ-

ment and price stability.”

The vote encompassed approval of the statement

below to be released at 2:00 p.m.:

“Information received since the Federal Open

Market Committee met in September suggests

that economic activity is expanding at a moder-

ate pace. Labor market conditions improved

somewhat further, with solid job gains and a

lower unemployment rate. On balance, a range

of labor market indicators suggests that under-

utilization of labor resources is gradually dimin-

ishing. Household spending is rising moderately

and business fixed investment is advancing,

while the recovery in the housing sector remains

slow. Inflation has continued to run below the

Committee’s longer-run objective. Market-based

measures of inflation compensation have

declined somewhat; survey-based measures of

longer-term inflation expectations have

remained stable.

Consistent with its statutory mandate, the Com-

mittee seeks to foster maximum employment

and price stability. The Committee expects that,

with appropriate policy accommodation, eco-

nomic activity will expand at a moderate pace,

with labor market indicators and inflation mov-

ing toward levels the Committee judges consis-

tent with its dual mandate. The Committee sees

the risks to the outlook for economic activity

and the labor market as nearly balanced.

Although inflation in the near term will likely be

held down by lower energy prices and other fac-

tors, the Committee judges that the likelihood of

inflation running persistently below 2 percent

has diminished somewhat since early this year.

The Committee judges that there has been a

substantial improvement in the outlook for the

labor market since the inception of its current

asset purchase program. Moreover, the Commit-

tee continues to see sufficient underlying

strength in the broader economy to support

ongoing progress toward maximum employment

in a context of price stability. Accordingly, the

Committee decided to conclude its asset pur-

chase program this month. The Committee is

maintaining its existing policy of reinvesting

principal payments from its holdings of agency

debt and agency mortgage-backed securities in

agency mortgage-backed securities and of roll-

ing over maturing Treasury securities at auction.

This policy, by keeping the Committee’s hold-

ings of longer-term securities at sizable levels,

should help maintain accommodative financial

conditions.

To support continued progress toward maxi-

mum employment and price stability, the Com-

mittee today reaffirmed its view that the current

0 to ¼ percent target range for the federal funds

rate remains appropriate. In determining how

long to maintain this target range, the Commit-

tee will assess progress—both realized and

expected—toward its objectives of maximum

employment and 2 percent inflation. This assess-

ment will take into account a wide range of

information, including measures of labor market

conditions, indicators of inflation pressures and

inflation expectations, and readings on financial

developments. The Committee anticipates, based

on its current assessment, that it likely will be

appropriate to maintain the 0 to ¼ percent tar-

get range for the federal funds rate for a consid-

erable time following the end of its asset pur-

chase program this month, especially if pro-

jected inflation continues to run below the

Committee’s 2 percent longer-run goal, and pro-

vided that longer-term inflation expectations

remain well anchored. However, if incoming

information indicates faster progress toward the

Committee’s employment and inflation objec-

tives than the Committee now expects, then

increases in the target range for the federal funds

rate are likely to occur sooner than currently

anticipated. Conversely, if progress proves

slower than expected, then increases in the target

range are likely to occur later than currently

anticipated.

When the Committee decides to begin to remove

policy accommodation, it will take a balanced

approach consistent with its longer-run goals of

maximum employment and inflation of 2 per-

cent. The Committee currently anticipates that,

even after employment and inflation are near

mandate-consistent levels, economic conditions

may, for some time, warrant keeping the target

federal funds rate below levels the Committee

views as normal in the longer run.”

258 101st Annual Report | 2014

Voting for this action: Janet L. Yellen, William C.

Dudley, Lael Brainard, Stanley Fischer, Richard W.

Fisher, Loretta J. Mester, Charles I. Plosser, Jerome

H. Powell, and Daniel K. Tarullo.

Voting against this action: Narayana Kocherlakota.

Mr. Kocherlakota dissented because he believed that,

in light of continued sluggishness in the inflation out-

look and the recent slide in market-based measures

of longer-term inflation expectations, the Committee

should commit to maintaining the current target

range for the federal funds rate at least until pro-

jected inflation one to two years ahead has returned

to 2 percent and should continue the asset purchase

program at its current pace. Mr. Kocherlakota noted

that when the Committee first reduced its asset pur-

chases in December 2013, it said in the post-meeting

statement that it would be monitoring inflation devel-

opments carefully for evidence that inflation was

moving back toward its objective over the medium

term; Mr. Kocherlakota indicated he saw no such

evidence.

Longer-Run Goals and Monetary Policy

Strategy

In the discussion at the January 2014 FOMC meeting

regarding the annual reaffirmation of the Statement

on Longer-Run Goals and Monetary Policy Strategy,

participants noted that, while they were generally sat-

isfied with the statement, it would be appropriate to

consider whether any changes might be warranted

before the statement was reaffirmed in 2015. The

Committee subsequently referred the matter to the

subcommittee on communications, which identified

possible issues for consideration by the full Commit-

tee. The subcommittee then asked the staff to pre-

pare a memorandum to the Committee exploring

those issues. At this meeting, a staff presentation dis-

cussed three issues related to the existing statement

that might warrant elaboration or clarification:

whether inflation persistently below the Committee’s

2 percent longer-run objective and inflation similarly

persistently above that objective would be regarded

as equally undesirable, whether additional informa-

tion should be provided about the “balanced

approach” that the Committee takes in promoting its

two objectives under circumstances in which these

objectives are judged not to be complementary, and

how financial stability is linked to the Committee’s

mandated goals of maximum employment and price

stability. Following the staff presentation, partici-

pants discussed a range of topics related to these

three issues and to monetary policy communications

more broadly. Participants generally thought that it

was worthwhile to periodically consider possible

changes to the statement, regardless of whether any

were ultimately implemented. Most participants

agreed that the existing consensus statement was

working well as a communications tool and judged

that the threshold for making changes to the docu-

ment should be a high one. On the specific issues,

there was widespread agreement that inflation mod-

erately above the Committee’s 2 percent goal and

inflation the same amount below that level were

equally costly—and many participants thought that

that view was largely shared by the public. One par-

ticipant suggested that the Committee should clarify

the time horizon within which it seeks to achieve its

inflation objective. Participants believed that the lan-

guage referring to the Committee’s balanced

approach in promoting its objectives was appropri-

ately broad and encompassed the views of partici-

pants. A number of participants noted that financial

stability is a necessary condition for the achievement

of the Committee’s longer-run goals. A few of them

offered suggestions for communicating more specifi-

cally how financial stability, and perhaps other asym-

metric risks to the outlook, are taken into account in

the setting of monetary policy. However, several

other participants noted that reaching an agreement

in the near term on clarifying the linkages between

monetary policy and financial stability could prove

challenging, in part because the issues involved are

complex and need further study. Regarding broader

communications issues, a number of participants

suggested that the subcommittee could again investi-

gate the feasibility and desirability of constructing a

consensus forecast, building on the lessons of the

experiments carried out in 2012, and several thought

that further enhancements to the Summary of Eco-

nomic Projections might also be worth considering.

No decisions were made at this meeting, and partici-

pants generally agreed that it would be useful to dis-

cuss these issues further at upcoming meetings.

Minutes of Federal Open Market Committee Meetings | October 259

It was agreed that the next meeting of the Committee

would be held on Tuesday–Wednesday, Decem-

ber 16–17, 2014. The meeting adjourned at 12:45

p.m. on October 29, 2014.

Notation Vote

By notation vote completed on October 7, 2014, the

Committee unanimously approved the minutes of the

Committee meeting held on September 16–17, 2014.

William B. English

Secretary

260 101st Annual Report | 2014

Meeting Held

on December 16–17, 2014

A meeting of the Federal Open Market Committee

was held in the offices of the Board of Governors of

the Federal Reserve System in Washington, D.C., on

Tuesday, December 16, 2014, at 1:00 p.m. and contin-

ued on Wednesday, December 17, 2014, at 9:00 a.m.

Present

Janet L. Yellen

Chair

William C. Dudley

Vice Chairman

Lael Brainard

Stanley Fischer

Richard W. Fisher

Narayana Kocherlakota

Loretta J. Mester

Charles I. Plosser

Jerome H. Powell

Daniel K. Tarullo

Christine Cumming, Charles L. Evans,

Jeffrey M. Lacker, Dennis P. Lockhart,

and John C. Williams

Alternate Members of the Federal Open Market

Committee

James Bullard, Esther L. George,

and Eric Rosengren

Presidents of the Federal Reserve Banks of St. Louis,

Kansas City, and Boston, respectively

William B. English

Secretary and Economist

Matthew M. Luecke

Deputy Secretary

Michelle A. Smith

Assistant Secretary

Scott G. Alvarez

General Counsel

Steven B. Kamin

Economist

David W. Wilcox

Economist

James A. Clouse, Thomas A. Connors,

Evan F. Koenig, Thomas Laubach,

Michael P. Leahy, Paolo A. Pesenti,

Samuel Schulhofer-Wohl, Mark E. Schweitzer,

and William Wascher

Associate Economists

Simon Potter

Manager, System Open Market Account

Lorie K. Logan

Deputy Manager, System Open Market Account

Robert deV. Frierson

Secretary of the Board, Office of the Secretary,

Board of Governors

Michael S. Gibson

Director, Division of Banking Supervision and

Regulation, Board of Governors

Stephen A. Meyer and William R. Nelson

Deputy Directors, Division of Monetary Affairs,

Board of Governors

Andreas Lehnert

Deputy Director, Office of Financial Stability Policy

and Research, Board of Governors

Andrew Figura, David Reifschneider,

and Stacey Tevlin

Special Advisers to the Board, Office of Board

Members, Board of Governors

Trevor A. Reeve

Special Adviser to the Chair, Office of Board

Members, Board of Governors

Linda Robertson

Assistant to the Board, Office of Board Members,

Board of Governors

Christopher J. Erceg

Senior Associate Director, Division of International

Finance, Board of Governors

Michael T. Kiley

Senior Adviser, Division of Research and

Statistics, and

Senior Associate Director, Office of Financial

Stability Policy and Research,

Board of Governors

Ellen E. Meade and Joyce K. Zickler

Senior Advisers, Division of Monetary Affairs,

Board of Governors

Attended the joint session of the Federal Open Market Com-

mittee and the Board of Governors.

Minutes of Federal Open Market Committee Meetings | December 261

Daniel M. Covitz, Eric M. Engen,

and Diana Hancock

Associate Directors, Division of Research and

Statistics, Board of Governors

David Lopez-Salido

Deputy Associate Director, Division of Monetary

Affairs, Board of Governors

John J. Stevens

Deputy Associate Director, Division of Research and

Statistics, Board of Governors

Stephanie R. Aaronson

Assistant Director, Division of Research and

Statistics, Board of Governors

Robert J. Tetlow

Adviser, Division of Monetary Affairs,

Board of Governors

Elizabeth Klee

Section Chief, Division of Monetary Affairs,

Board of Governors

Katie Ross

Manager, Office of the Secretary,

Board of Governors

Achilles Sangster II

Information Management Analyst, Division of

Monetary Affairs, Board of Governors

Kelly J. Dubbert

First Vice President, Federal Reserve Bank of

Kansas City

David Altig and Alberto G. Musalem

Executive Vice Presidents, Federal Reserve Banks of

Atlanta and New York, respectively

Michael Dotsey, Geoffrey Tootell,

and Christopher J. Waller

Senior Vice Presidents, Federal Reserve Banks of

Philadelphia, Boston, and St. Louis, respectively

Hesna Genay, Douglas Tillett,

Robert G. Valletta, and Alexander L. Wolman

Vice Presidents, Federal Reserve Banks of

Chicago, Chicago, San Francisco, and Richmond,

respectively

Willem Van Zandweghe

Assistant Vice President, Federal Reserve Bank of

Kansas City

Developments in Financial Markets and

the Federal Reserve’s Balance Sheet

In a joint session of the Federal Open Market Com-

mittee (FOMC) and the Board of Governors of the

Federal Reserve System, the manager of the System

Open Market Account (SOMA) reported on devel-

opments in domestic and foreign financial markets as

well as System open market operations conducted

during the period since the Committee met on Octo-

ber 28–29, 2014. In addition, the manager reviewed

the implications of recent foreign central bank policy

actions for the international portion of the SOMA

portfolio. The manager also provided an update on

staff work related to potential arrangements that

would allow depository institutions to pledge funds

held in a segregated account at the Federal Reserve as

collateral in borrowing transactions with private

creditors and which could potentially provide an

additional supplementary tool during policy normal-

ization. After further review, staff analysis suggested

that such accounts involved a number of operational,

regulatory, and policy issues. These issues raised

questions about these accounts’ possible effectiveness

that would be diff icult to resolve in a timely fashion.

It was therefore decided that further work to imple-

ment such accounts would be shelved for now.

The deputy manager followed with a discussion of

the outcomes of recent tests of supplementary nor-

malization tools, namely the Term Deposit Facility

(TDF) and term and overnight reverse repurchase

agreements (term RRPs and ON RRPs, respectively).

Regarding the TDF testing, the introduction of an

early withdrawal option led to significant increases in

the number of participating depository institutions

and in take-up relative to earlier operations without

this feature. As expected, both participation and

take-up in the operations continued to be sensitive to

the offering rate and maximum individual award

amount. The Open Market Desk successfully con-

ducted the first two of four preannounced term RRP

operations extending across the end of the year to

help address expected downward pressures on short-

term rates. Commentary from market participants

suggested that these operations may help alleviate

some of the volatility in short-term rates that would

otherwise be expected around the year-end. Regard-

ing the ON RRP testing—during which the offered

262 101st Annual Report | 2014

rate was varied between 3 and 10 basis points—in-

creases in offered rates appeared to put some upward

pressure on unsecured money market rates, as antici-

pated, and the offered rate continued to provide a

soft floor for secured rates. Changes in the spread

between the rate paid on reserves and the ON RRP

offered rate did not appear to affect the volume of

activity in the federal funds market. While the tests of

ON RRPs had been informative, the staff suggested

that additional testing could further improve under-

standing of how this supplementary tool could be

used to achieve greater control of the federal funds

rate during policy normalization. Accordingly, par-

ticipants discussed a draft resolution to extend the

Desk’s authority to conduct the ON RRP exercise

for 12 months beyond the expiration of the current

authorization on January 30, 2015. It was noted that

a one-year extension to what had been a one-year

testing program was a practical step and signaled

nothing about either the timing of the start of policy

normalization or how long an ON RRP facility

might be needed.

Following the discussion of the extension of ON

RRP test operations, the Committee unanimously

approved the following resolution:

“The Federal Open Market Committee (FOMC)

authorizes the Federal Reserve Bank of New

York to conduct a series of overnight reverse

repurchase operations involving U.S. govern-

ment securities for the purpose of further assess-

ing the appropriate structure of such operations

in supporting the implementation of monetary

policy during normalization. The reverse repur-

chase operations authorized by this resolution

shall be (i) conducted at an offering rate that

may vary from zero to five basis points; (ii) for

an overnight term or such longer term as is war-

ranted to accommodate weekend, holiday, and

similar trading conventions; (iii) subject to a per-

counterparty limit of up to $30 billion per day;

(iv) subject to an overall size limit of up to

$300 billion per day; and (v) awarded to all sub-

mitters (A) at the specified offering rate if the

sum of the bids received is less than or equal to

the overall size limit, or (B) at the stop-out rate,

determined by evaluating bids in ascending

order by submitted rate up to the point at which

the total quantity of bids equals the overall size

limit, with all bids below this rate awarded in full

at the stop-out rate and all bids at the stop-out

rate awarded on a pro rata basis, if the sum of

the counterparty offers received is greater than

the overall size limit. The Chair must approve

any change in the offering rate within the range

specified in (i) and any changes to the per-

counterparty and overall size limits subject to

the limits specified in (iii) and (iv). The System

Open Market Account manager will notify the

FOMC in advance about any changes to the

offering rate, per-counterparty limit, or overall

size limit applied to operations. These opera-

tions shall be authorized for one additional year

beyond the previously authorized end date—

that is, through January 29, 2016.”

By unanimous vote, the Committee ratified the

Desk’s domestic transactions over the intermeeting

period. There were no intervention operations in for-

eign currencies for the System’s account over the

intermeeting period.

The Board meeting concluded at the end of the dis-

cussion of developments in financial markets and the

Federal Reserve’s balance sheet.

Staff Review of the Economic Situation

The information reviewed for the December 16–17

meeting suggested that economic activity was

increasing at a moderate pace in the fourth quarter

and that labor market conditions had improved fur-

ther. Consumer price inflation continued to run

below the FOMC’s longer-run objective of 2 percent,

partly restrained by declining energy prices. Market-

based measures of inflation compensation moved

lower, but survey measures of longer-run inflation

expectations remained stable.

Total nonfarm payroll employment expanded in

October and November at a faster pace than in the

third quarter. The unemployment rate edged down to

5.8 percent in October and remained at that level in

November. Both the labor force participation rate

and the employment-to-population ratio rose slightly,

and the share of workers employed part time for eco-

nomic reasons declined. The rate of private-sector

job openings stayed, on balance, at its recent elevated

level in September and October, and the rates of hir-

ing and of quits stepped up on net.

Industrial production rose in October and November,

led by strong increases in manufacturing output.

Automakers’ schedules indicated that the pace of

light motor vehicle assemblies would move up some-

what in the f irst quarter, and broader indicators of

manufacturing production, such as the readings on

Minutes of Federal Open Market Committee Meetings | December 263

new orders from the national and regional manufac-

turing surveys, were generally consistent with solid

gains in factory output over the near term.

Real personal consumption expenditures (PCE)

appeared to be rising robustly in the fourth quarter.

The components of the nominal retail sales data used

to construct estimates of PCE rose strongly in Octo-

ber and November, and light motor vehicle sales

increased noticeably. Key factors that influence

household spending pointed toward further solid

PCE growth. Real disposable income rose further in

October, energy prices continued to decline, house-

holds’ net worth likely increased as home values

advanced, and consumer sentiment in early Decem-

ber from the Thomson Reuters/University of Michi-

gan Surveys of Consumers was at its highest level

since before the most recent recession.

The pace of activity in the housing sector generally

remained slow. Both starts and permits of new

single-family homes increased only a little, on bal-

ance, in October and November. Starts of multifam-

ily units declined, on net, over the past two months.

Sales of new and existing homes rose modestly in

October.

Real private expenditures for business equipment and

intellectual property appeared to be decelerating in

the fourth quarter. Nominal orders and shipments of

nondefense capital goods excluding aircraft declined

in October. However, new orders for these capital

goods remained above the level of shipments, and

other forward-looking indicators, such as national

and regional surveys of business conditions, were

generally consistent with modest near-term gains in

business equipment spending. Firms’ nominal spend-

ing for nonresidential structures edged down in Octo-

ber after rising slightly in the third quarter.

Data for October and November pointed toward a

decline in real federal government purchases in the

fourth quarter after a surprisingly large third-quarter

increase. Real state and local government purchases

appeared to be rising modestly in the fourth quarter

as their payrolls and construction expenditures

increased a little in recent months.

The U.S. international trade deficit was little changed

in October, as exports and imports both rose. The

gains in exports were concentrated in aircraft and

other capital goods, and the increase in imports

reflected a pickup in purchases of automotive prod-

ucts and computers. But with the October deficit

remaining wider than the monthly average in the

third quarter, real net exports looked to be declining

in the fourth quarter.

Both total U.S. consumer price inflation, as measured

by the PCE price index, and core inflation, as meas-

ured by PCE prices excluding food and energy, were

about 1½ percent over the 12 months ending in Octo-

ber; consumer energy prices declined, while consumer

food prices rose more than overall prices. Over the

12 months ending in November, total inflation as

measured by the consumer price index (CPI) was

1¼ percent, partly reflecting the further decline in

energy prices, while core CPI inflation was 1¾ per-

cent. Measures of expected long-run inflation from a

variety of surveys, including the Michigan survey, the

Blue Chip Economic Indicators, the Survey of Profes-

sional Forecasters, and the Desk’s Survey of Primary

Dealers, remained stable. In contrast, market-based

measures of inflation compensation moved lower.

Labor compensation continued to increase only a

little faster than consumer prices. Compensation per

hour in the nonfarm business sector rose about 2 per-

cent over the year ending in the third quarter. Similar

rates of increase were observed for the employment

cost index over the same year-long period and for

average hourly earnings for all employees over the

12 months ending in November.

Overall growth in foreign real gross domestic product

(GDP) remained subdued in the third quarter. In the

advanced foreign economies, real GDP contracted

for a second consecutive quarter in Japan, rose only

slightly in the euro area, but continued to expand

moderately in Canada and the United Kingdom. In

the emerging market economies, economic growth

slowed in Mexico in the third quarter and remained

sluggish in Brazil; economic growth in China likely

slowed moderately in the fourth quarter. Oil prices

continued to decline, likely reflecting favorable supply

developments as well as some weakening in global

demand. Inflation in the advanced foreign economies

remained quite low during the intermeeting period,

partly because of the fall in oil prices. Declining oil

prices had a smaller effect on inflation in the emerg-

ing market economies, reflecting the greater preva-

lence of administered energy prices.

Staff Review of the Financial Situation

Over the intermeeting period, market participants

became a bit more optimistic about U.S. economic

prospects while also responding to economic and

264 101st Annual Report | 2014

policy developments abroad. The sharp decline in oil

prices weighed on inflation compensation and left a

mixed imprint on other asset markets. On net, yields

on longer-term Treasury securities fell, corporate

bond spreads widened, equity prices were little

changed, and the foreign exchange value of the dollar

appreciated.

Economic data releases reinforced the views of mar-

ket participants that the U.S. economic recovery con-

tinued to gain momentum. In addition, investors

appeared to read the October FOMC statement as

suggesting a slightly less accommodative path for

future monetary policy than they had previously

expected.

Results from the December Survey of Primary Deal-

ers indicated that the dealers’ expectations for the

timing of the first increase in the federal funds target

range and the subsequent policy path were little

changed from the October survey. The average prob-

ability distribution of the expected date of liftoff

continued to imply that the most likely date would be

around the middle of 2015, with the distribution hav-

ing narrowed slightly compared with the previous

survey.

Longer-term nominal Treasury yields declined sig-

nificantly, on balance, over the intermeeting period.

Measures of inflation compensation based on Treas-

ury Inflation-Protected Securities and on inflation

swaps decreased, reportedly reflecting, in part, the

decline in oil prices and increased concerns about

global economic growth.

Broad U.S. equity price indexes were about

unchanged over the intermeeting period. Option-

implied volatility for one-month returns on the S&P

500 index—the VIX—rose sharply late in the period

to levels close to those in mid-October. Investment-

and speculative-grade corporate bond spreads wid-

ened over the period. Spreads on speculative-grade

bonds for energy-related firms rose substantially

because of the pronounced decline in oil prices.

Business financing flows were robust over the inter-

meeting period. Gross bond issuance by nonfinancial

corporations was the strongest in more than a year.

Nonfinancial commercial paper outstanding

expanded noticeably in November, more than com-

pensating for a slowdown in October. Commercial

and industrial loans on banks’ books continued to

expand briskly. In addition, issuance of both lever-

aged loans and collateralized loan obligations were

strong in October and November.

Financing for commercial real estate (CRE) remained

broadly available. CRE loans on banks’ books

expanded at a moderate pace in October and Novem-

ber, and issuance of commercial mortgage-backed

securities (CMBS) was strong. According to the

December Senior Credit Off icer Opinion Survey on

Dealer Financing Terms, broker-dealers had eased

somewhat all of the terms on which they finance

CMBS for most-favored clients.

Measures of residential mortgage lending conditions

were little changed over the intermeeting period.

Credit conditions for mortgages remained tight for

borrowers with less-than-pristine credit. Interest rates

on 30-year fixed-rate mortgages declined, consistent

with the moves in longer-term Treasury yields. Refi-

nancing activity was subdued.

Financing conditions in consumer credit markets

generally stayed accommodative. Auto and student

loan balances expanded robustly in October, and

revolving credit balances increased at a moderate

pace. Issuance of consumer asset-backed securities

was strong in the fourth quarter.

Reflecting divergent economic and monetary policy

prospects in the United States and abroad, the dollar

appreciated substantially against most currencies

over the intermeeting period. The dollar moved up

significantly against the yen as the Bank of Japan

expanded its asset purchase program as well as

against the currencies of oil exporters as oil prices

declined. Over the period, market participants

seemed to conclude that monetary policy in Europe

was likely to be put on a more accommodative path,

and 10-year yields in Germany and the United King-

dom declined further. As German yields fell to new

record lows, spreads of most euro-area peripheral

bonds over those yields narrowed. Changes in stock

prices abroad were mixed, on net, over the intermeet-

ing period: There were large increases in Japan and

China along with large decreases in oil-exporting

countries, such as Canada, Mexico, and Russia.

Late in the intermeeting period, following the sharp

fall in oil prices, the Russian ruble depreciated rapidly

and substantially, prompting the Russian central

bank, which had already raised its policy rate in early

Minutes of Federal Open Market Committee Meetings | December 265

November, to raise the rate twice more in five days,

with the most recent increase following an unsched-

uled policy meeting on December 15.

Staff Economic Outlook

In the staff forecast prepared for the December

FOMC meeting, real GDP growth in the second half

of 2014 was higher than in the projection for the

October meeting, largely reflecting stronger-than-

expected data for PCE. Nevertheless, real GDP

growth was anticipated to slow in the fourth quarter

as both net exports and federal government pur-

chases—important positive contributors to real GDP

growth in the third quarter—were anticipated to

drop back. The staff’s medium-term forecast for real

GDP growth was revised up a little on net. The pro-

jected path for oil prices was lower, and the trajectory

for equity prices was a bit higher. And although the

projected path of the dollar was revised up, the staff

revised down its estimate of how much the apprecia-

tion of the dollar since last summer would restrain

projected growth in real GDP. The staff continued to

forecast that real GDP would expand at a faster pace

in 2015 and 2016 than it had this year and that it

would rise more quickly than potential output, sup-

ported by increases in consumer and business confi-

dence and a pickup in foreign economic growth,

along with monetary policy that was assumed to

remain highly accommodative for some time. In

2017, real GDP growth was projected to begin slow-

ing toward, but to remain above, the rate of potential

output growth as the normalization of monetary

policy was assumed to proceed. The expansion in

economic activity over the medium term was antici-

pated to slowly reduce resource slack, and the unem-

ployment rate was expected to decline gradually and

to temporarily move slightly below the staff’s esti-

mate of its longer-run natural rate.

The staff’s forecast for inflation in the near term was

revised down to reflect the further large energy price

declines since the October FOMC meeting, which

were anticipated to lead to a temporary decrease in

the total PCE price index late this year and early next

year. The staff’s inflation projection for the next few

years was essentially unchanged; the staff continued

to project that inflation would move up gradually

toward, but run somewhat below, the Committee’s

longer-run objective of 2 percent. Nevertheless, infla-

tion was projected to reach the Committee’s objective

over time, with longer-run inflation expectations

assumed to remain stable, prices of energy and non-

oil imports forecast to begin rising next year, and

slack in labor and product markets anticipated to

diminish slowly.

The staff viewed the uncertainty around its projec-

tions for real GDP growth, the unemployment rate,

and inflation as similar to the average over the past

20 years. The risks to the forecast for real GDP

growth and inflation were viewed as tilted a little to

the downside, reflecting the staff’s assessment that

neither monetary policy nor fiscal policy was well

positioned to help the economy withstand adverse

shocks. At the same time, the staff viewed the risks

around its outlook for the unemployment rate as

roughly balanced.

Participants’ Views on Current Conditions

and the Economic Outlook

In conjunction with this FOMC meeting, members

of the Board of Governors and the Federal Reserve

Bank presidents submitted their projections of the

most likely outcomes for real GDP growth, the

unemployment rate, inflation, and the federal funds

rate for each year from 2014 through 2017 and over

the longer run, conditional on each participant’s

judgment of appropriate monetary policy. The

longer-run projections represent each participant’s

assessment of the rate to which each variable would

be expected to converge, over time, under appropriate

monetary policy and in the absence of further shocks

to the economy. These economic projections and

policy assessments are described in the Summary of

Economic Projections (SEP), which is attached as an

addendum to these minutes.

In their discussion of the economic situation and the

outlook, meeting participants regarded the informa-

tion received over the intermeeting period as sup-

porting their view that economic activity was

expanding at a moderate pace. Labor market condi-

tions improved further, with solid job gains and a

lower unemployment rate; participants judged that

the underutilization of labor resources was continu-

ing to diminish. Participants expected that, over the

medium term, real economic activity would increase

at a pace sufficient to lead to further improvements

in labor market indicators toward levels consistent

with the Committee’s objective of maximum employ-

ment. Inflation was continuing to run below the

Committee’s longer-run objective, reflecting in part

continued reductions in oil prices and falling import

prices. Market-based measures of inflation compen-

sation declined further, while survey-based measures

of longer-term inflation expectations remained

266 101st Annual Report | 2014

stable. Participants generally anticipated that infla-

tion would rise gradually toward the Committee’s

2 percent objective as the labor market improved fur-

ther and the transitory effects of lower energy prices

and other factors dissipated. The risks to the outlook

for economic activity and the labor market were seen

as nearly balanced. Some participants suggested that

the recent domestic economic data had increased

their confidence in the outlook for growth going for-

ward. Participants generally regarded the net effect of

the recent decline in energy prices as likely to be posi-

tive for economic activity and employment. However,

many of them thought that a further deterioration in

the foreign economic situation could result in slower

domestic economic growth than they currently

expected.

Household spending continued to advance over the

intermeeting period, and reports from contacts in

several parts of the country indicated that recent

retail or auto sales had been robust. Many partici-

pants pointed to relatively high levels of consumer

confidence as signaling near-term strength in discre-

tionary consumer spending, and most participants

judged that the recent significant decline in energy

prices would provide a boost to consumer spending.

Participants also cited solid gains in payroll employ-

ment, low interest rates, and the decline in levels of

household debt relative to income as factors that

were expected to support continued growth in con-

sumer spending. In contrast, residential construction

continued to be slow, and recent readings on single-

family building permits suggested that this sluggish-

ness was likely to continue in the short run.

Industry contacts pointed to generally solid business

conditions, with businesses in many parts of the

country expressing some optimism about prospects

for further improvement in 2015. Manufacturing

activity was strong, as indicated by the index of

industrial production and a variety of regional

reports. Information from some regions pointed to a

pickup in capital investment, although the continued

decline in oil prices led business contacts to expect a

slowdown in drilling activity and, if prices remain

low, reduced capital investment in the oil and gas

industries. In the agricultural sector, the robust fall

harvest reportedly lowered crop prices; operating

margins for food processing and farm equipment

businesses have been narrowing, putting stress on

some producers.

In their discussion of the foreign economic outlook,

participants noted that the implications of the drop

in crude oil prices would differ across regions, espe-

cially if the price declines affected inflation expecta-

tions and financial markets; a few participants said

that the effect on overseas employment and output as

a whole was likely to be positive. While some partici-

pants had lowered their assessments of the prospects

for global economic growth, several noted that the

likelihood of further responses by policymakers

abroad had increased. Several participants indicated

that they expected slower economic growth abroad to

negatively affect the U.S. economy, principally

through lower net exports, but the net effect of lower

oil prices on U.S. economic activity was anticipated

to be positive.

Participants saw broad-based improvement in labor

market conditions over the intermeeting period,

including solid gains in payroll employment, a slight

reduction in the unemployment rate, and increases in

the rates of hiring and quits. Positive signals were

also seen in the decline in the share of workers

employed part time for economic reasons and in the

increase in the labor force participation rate. These

favorable trends notwithstanding, the levels of these

measures suggested to some participants that there

remained more labor market slack than was indicated

by the unemployment rate alone. However, a few oth-

ers continued to view the unemployment rate as a

reliable indicator of overall labor market conditions

and saw a narrower degree of labor underutilization

remaining. Although a few participants suggested

that the recent uptick in the employment cost index

or average hourly earnings could be a tentative sign

of an upturn in wage growth, most participants saw

no clear evidence of a broad-based acceleration in

wages. A couple of participants, however, pointing to

the weak statistical relationship between wage infla-

tion and labor market conditions, suggested that the

pace of wage inflation was providing relatively little

information about the degree of labor under-

utilization.

Participants generally anticipated that inflation was

likely to decline further in the near term, reflecting

the reduction in oil prices and the effects of the rise

in the foreign exchange value of the dollar on import

prices. Most participants saw these influences as tem-

porary and thus continued to expect inflation to

move back gradually to the Committee’s 2 percent

longer-run objective as the labor market improved

further in an environment of well-anchored inflation

expectations. Survey-based measures of longer-term

inflation expectations remained stable, although

market-based measures of inflation compensation

Minutes of Federal Open Market Committee Meetings | December 267

over the next five years, as well as over the five-year

period beginning five years ahead, moved down fur-

ther over the intermeeting period. Participants dis-

cussed various explanations for the decline in market-

based measures, including a fall in expected future

inflation, reductions in inflation risk premiums, and

higher liquidity and other premiums that might be

influencing the prices of Treasury Inflation-Protected

Securities and inflation derivatives. Model-based

decompositions of inflation compensation seemed to

support the message from surveys that longer-term

inflation expectations had remained stable, although

it was observed that these results were sensitive to the

assumptions underlying the particular models used.

It was noted that even if the declines in inflation

compensation reflected lower inflation risk premiums

rather than a reduction in expected inflation, policy-

makers might still want to take them into account

because such changes could reflect increased con-

cerns on the part of investors about adverse out-

comes in which low inflation was accompanied by

weak economic activity. In the end, participants gen-

erally agreed that it would take more time and analy-

sis to draw definitive conclusions regarding the recent

behavior of inflation compensation.

In their discussion of financial market developments,

participants observed that movements in asset prices

over the intermeeting period appeared to have been

importantly influenced by concerns about prospects

for foreign economic growth and by associated

expectations of monetary policy actions in Europe

and Japan. A couple of participants remarked on the

apparent disparity between market-based measures

of expected future U.S. short-term interest rates and

projections for short-term rates based on surveys or

based on the median of federal funds rate projections

in the SEP. One participant noted that very low term

premiums in market-based measures might explain at

least some portion of this gap. Another possibility

was that market-based measures might be assigning

considerable weight to less favorable outcomes for

the U.S. economy in which the federal funds rate

would remain low for quite some time or fall back to

very low levels in the future, whereas the projections

in the SEP report the paths for the federal funds rate

that participants see as appropriate given their views

of the most likely evolution of inflation and real

activity.

Participants discussed a number of risks to the eco-

nomic outlook. Many participants regarded the

international situation as an important source of

downside risks to domestic real activity and employ-

ment, particularly if declines in oil prices and the per-

sistence of weak economic growth abroad had a sub-

stantial negative effect on global financial markets or

if foreign policy responses were insufficient. How-

ever, the downside risks were seen as nearly balanced

by risks to the upside. Several participants, pointing

to indicators of consumer and business confidence as

well as to the solid record of payroll employment

gains in 2014, suggested that the real economy may

end up showing more momentum than anticipated,

while a few others thought that the boost to domestic

spending coming from lower energy prices could turn

out to be quite large. With regard to inflation, a num-

ber of participants saw a risk that it could run persis-

tently below their 2 percent objective, with some

expressing concern that such an outcome could

undermine the credibility of the Committee’s com-

mitment to that objective. Some participants were

worried that the recent substantial fall in energy

prices could lead to a reduction in longer-term infla-

tion expectations, while others were concerned that

the decline in market-based measures of inflation

compensation might reflect, in part, that such a

decline had already begun. However, a couple of oth-

ers noted that if the unemployment rate continued to

decline quickly, wage and price inflation could rise

more than generally anticipated.

In their discussion of communications regarding the

path of the federal funds rate over the medium term,

most participants concluded that updating the Com-

mittee’s forward guidance would be appropriate in

light of the conclusion of the asset purchase program

in October and the further progress that the economy

had made toward the Committee’s objectives. Most

participants agreed that it would be useful to state

that the Committee judges that it can be patient in

beginning to normalize the stance of monetary

policy; they noted that such language would provide

more flexibility to adjust policy in response to incom-

ing information than the previous language, which

had tied the beginning of normalization to the end of

the asset purchase program. This approach was seen

as consistent, given the Committee’s assessment of

the economic outlook at the current meeting, with

the Committee’s previous statement. Most partici-

pants thought the reference to patience indicated that

the Committee was unlikely to begin the normaliza-

tion process for at least the next couple of meetings.

Some participants regarded the revised language as

risking an unwarranted concentration of market

expectations for the timing of the initial increase in

the federal funds rate target on a narrow range of

dates around mid-2015, and as not adequately allow-

268 101st Annual Report | 2014

ing for the possibility that economic conditions

might evolve in a way that could call for either an

earlier or a later liftoff date. A few participants sug-

gested that the statement should focus on the eco-

nomic conditions that would likely accompany the

decision to raise rates. Participants generally stressed

the need to communicate that the timing of the first

increase in the federal funds rate would depend on

the incoming data and their implications for the

Committee’s assessment of progress toward its objec-

tives of maximum employment and inflation of

2 percent. With lower energy prices and the stronger

dollar likely to keep inflation below target for some

time, it was noted that the Committee might begin

normalization at a time when core inflation was near

current levels, although in that circumstance partici-

pants would want to be reasonably confident that

inflation will move back toward 2 percent over time.

A few participants spoke of the importance of

explaining to the public how economic and financial

conditions would influence the Committee’s deci-

sions regarding the appropriate path for the federal

funds rate after normalization begins. It was noted

that to the extent that such guidance can be effec-

tively communicated, the precise date of liftoff

becomes less important for economic outcomes. In

this regard, some participants emphasized that policy

will still be highly accommodative for a time after the

first increase in the federal funds rate target, given the

difference between the current setting of the federal

funds rate target range and the Committee’s view of

the longer-run normal rate as well as the Federal

Reserve’s elevated holdings of longer-term securities.

Committee Policy Action

In their discussion of monetary policy for the period

ahead, members judged that information received

since the FOMC met in October indicated that eco-

nomic activity was expanding at a moderate pace.

Labor market conditions had improved further, with

solid job gains and a lower unemployment rate; taken

as a whole, labor market indicators suggested that the

underutilization of labor resources was continuing to

diminish. Household spending was rising moderately

and business fixed investment was advancing, while

the recovery in the housing sector remained slow.

Inflation had continued to run below the Commit-

tee’s longer-run objective, in part reflecting declines

in energy prices. Market-based measures of inflation

compensation had declined somewhat further, but

survey-based measures of longer-term inflation

expectations had remained stable. The Committee

expected that, with appropriate monetary policy

accommodation, economic activity would continue

to expand at a moderate pace, with labor market

indicators moving toward levels the Committee

judges consistent with its dual mandate. The Com-

mittee also expected that inflation would rise gradu-

ally toward 2 percent as the labor market improves

further and the transitory effects of lower energy

prices and other factors dissipate.

In their discussion of language for the postmeeting

statement, members generally agreed that they

should acknowledge the broad improvement in labor

market conditions over the intermeeting period as

well as their judgment that labor market slack contin-

ued to diminish. In addition, they decided that the

statement should note that the low level of inflation

seen of late partly reflected the recent decline in

energy prices. The Committee modified the previous

statement language to make clear that it expects that

inflation will rise gradually toward 2 percent as the

labor market improves further and the transitory

effects of lower energy prices and other factors dissi-

pate. Given the uncertainties about the outlook for

inflation, members decided that it would be appropri-

ate to indicate that the Committee continues to moni-

tor inflation developments closely.

The Committee agreed to maintain the target range

for the federal funds rate at 0 to ¼ percent and to

reaffirm the indication in the statement that the

Committee’s decision about how long to maintain

the current target range for the federal funds rate

would depend on its assessment of actual and

expected progress toward its objectives of maximum

employment and 2 percent inflation. Most members

agreed to update the Committee’s forward guidance

with language indicating that it judges that it can be

patient in beginning to normalize the stance of mon-

etary policy. In order to avoid the misinterpretation

that this new wording reflected a change in the Com-

mittee’s policy intentions, the statement included a

sentence indicating that the Committee sees this

guidance as consistent with its previous statement

that it likely will be appropriate to maintain the 0 to

¼ percent target range for the federal funds rate for a

considerable time following the end of its asset pur-

chase program in October, especially if projected

inflation continues to run below the Committee’s

2 percent longer-run goal, and provided that longer-

term inflation expectations remain well anchored.

Two members thought that this forward guidance did

not take sufficient account of the progress that had

been made toward the Committee’s objectives, while

Minutes of Federal Open Market Committee Meetings | December 269

one wanted to strengthen the forward guidance in

order to underscore the Committee’s commitment to

its 2 percent inflation objective. Members agreed that

their policy decisions would remain data dependent,

and they continued to include wording in the state-

ment noting that if incoming information indicates

faster progress toward the Committee’s employment

and inflation objectives than the Committee now

expects, then increases in the target range for the fed-

eral funds rate would likely occur sooner than cur-

rently anticipated, and, similarly, that if progress

proves slower than expected, then increases in the tar-

get range would likely occur later than currently

anticipated. The Committee decided to maintain its

policy of reinvesting principal payments from its

holdings of agency debt and agency mortgage-

backed securities in agency mortgage-backed securi-

ties and of rolling over maturing Treasury securities

at auction. This policy, by keeping the Committee’s

holdings of longer-term securities at sizable levels,

should help maintain accommodative financial con-

ditions. Finally, the Committee also decided to reiter-

ate its expectation that, even after employment and

inflation are near mandate-consistent levels, eco-

nomic conditions may, for some time, warrant keep-

ing the target federal funds rate below levels the

Committee views as normal in the longer run. At the

conclusion of the discussion, the Committee voted to

authorize and direct the Federal Reserve Bank of

New York, until it was instructed otherwise, to

execute transactions in the SOMA in accordance

with the following domestic policy directive:

“Consistent with its statutory mandate, the Fed-

eral Open Market Committee seeks monetary

and financial conditions that will foster maxi-

mum employment and price stability. In particu-

lar, the Committee seeks conditions in reserve

markets consistent with federal funds trading in

a range from 0 to ¼ percent. The Committee

directs the Desk to undertake open market

operations as necessary to maintain such condi-

tions. The Committee directs the Desk to main-

tain its policy of rolling over maturing Treasury

securities into new issues and its policy of rein-

vesting principal payments on all agency debt

and agency mortgage-backed securities in

agency mortgage-backed securities. The Com-

mittee also directs the Desk to engage in dollar

roll and coupon swap transactions as necessary

to facilitate settlement of the Federal Reserve’s

agency mortgage-backed securities transactions.

The System Open Market Account manager and

the secretary will keep the Committee informed

of ongoing developments regarding the System’s

balance sheet that could affect the attainment

over time of the Committee’s objectives of

maximum employment and price stability.”

The vote encompassed approval of the statement

below to be released at 2:00 p.m.:

“Information received since the Federal Open

Market Committee met in October suggests that

economic activity is expanding at a moderate

pace. Labor market conditions improved further,

with solid job gains and a lower unemployment

rate. On balance, a range of labor market indica-

tors suggests that underutilization of labor

resources continues to diminish. Household

spending is rising moderately and business fixed

investment is advancing, while the recovery in

the housing sector remains slow. Inflation has

continued to run below the Committee’s longer-

run objective, partly reflecting declines in energy

prices. Market-based measures of inflation com-

pensation have declined somewhat further;

survey-based measures of longer-term inflation

expectations have remained stable.

Consistent with its statutory mandate, the Com-

mittee seeks to foster maximum employment

and price stability. The Committee expects that,

with appropriate policy accommodation, eco-

nomic activity will expand at a moderate pace,

with labor market indicators moving toward lev-

els the Committee judges consistent with its dual

mandate. The Committee sees the risks to the

outlook for economic activity and the labor

market as nearly balanced. The Committee

expects inflation to rise gradually toward 2 per-

cent as the labor market improves further and

the transitory effects of lower energy prices and

other factors dissipate. The Committee contin-

ues to monitor inflation developments closely.

To support continued progress toward maxi-

mum employment and price stability, the Com-

mittee today reaffirmed its view that the current

0 to ¼ percent target range for the federal funds

rate remains appropriate. In determining how

long to maintain this target range, the Commit-

tee will assess progress—both realized and

expected—toward its objectives of maximum

employment and 2 percent inflation. This assess-

ment will take into account a wide range of

information, including measures of labor market

conditions, indicators of inflation pressures and

270 101st Annual Report | 2014

inflation expectations, and readings on financial

developments. Based on its current assessment,

the Committee judges that it can be patient in

beginning to normalize the stance of monetary

policy. The Committee sees this guidance as con-

sistent with its previous statement that it likely

will be appropriate to maintain the 0 to ¼ per-

cent target range for the federal funds rate for a

considerable time following the end of its asset

purchase program in October, especially if pro-

jected inflation continues to run below the Com-

mittee’s 2 percent longer-run goal, and provided

that longer-term inflation expectations remain

well anchored. However, if incoming informa-

tion indicates faster progress toward the Com-

mittee’s employment and inflation objectives

than the Committee now expects, then increases

in the target range for the federal funds rate are

likely to occur sooner than currently anticipated.

Conversely, if progress proves slower than

expected, then increases in the target range are

likely to occur later than currently anticipated.

The Committee is maintaining its existing policy

of reinvesting principal payments from its hold-

ings of agency debt and agency mortgage-

backed securities in agency mortgage-backed

securities and of rolling over maturing Treasury

securities at auction. This policy, by keeping the

Committee’s holdings of longer-term securities

at sizable levels, should help maintain accommo-

dative financial conditions.

When the Committee decides to begin to remove

policy accommodation, it will take a balanced

approach consistent with its longer-run goals of

maximum employment and inflation of 2 per-

cent. The Committee currently anticipates that,

even after employment and inflation are near

mandate-consistent levels, economic conditions

may, for some time, warrant keeping the target

federal funds rate below levels the Committee

views as normal in the longer run.”

Voting for this action: Janet L. Yellen, William C.

Dudley, Lael Brainard, Stanley Fischer, Loretta J.

Mester, Jerome H. Powell, and Daniel K. Tarullo.

Voting against this action: Richard W. Fisher,

Narayana Kocherlakota, and Charles I. Plosser.

Mr. Fisher agreed that the Committee should be

patient in beginning to normalize the stance of mon-

etary policy. He dissented because he saw the

improvement in the U.S. economic outlook since

October as indicating that it likely will be appropriate

to increase the federal funds rate sooner than the

Committee’s current statement envisions.

Mr. Kocherlakota dissented because he believed that

the Committee’s decision and statement did not

respond to ongoing below-target inflation and falling

market-based measures of longer-term inflation

expectations. In his judgment, the credibility of the

Committee’s 2 percent inflation target was at risk,

calling for a more accommodative policy stance.

Mr. Plosser dissented for two reasons. He believed

that the Committee’s policy guidance should be more

data dependent and not focus on time. In his view,

the improvement in economic conditions that has

occurred over the course of the year was greater than

anticipated, and he believed that the statement

should communicate that there is a measurable prob-

ability that liftoff may occur in the first quarter of

next year, even if the most likely scenario is for nor-

malization to begin around midyear. He further

believed that waiting too long to raise rates could

lead to the need for more-aggressive policy in the

future, which could potentially lead to unnecessary

volatility and instability.

It was agreed that the next meeting of the Committee

would be held on Tuesday–Wednesday, January 27–

28, 2015. The meeting adjourned at 11:00 a.m. on

December 17, 2014.

Notation Vote

By notation vote completed on November 18, 2014,

the Committee unanimously approved the minutes of

the Committee meeting held on October 28–29, 2014.

William B. English

Secretary

Minutes of Federal Open Market Committee Meetings | December 271

Addendum:

Summary of Economic Projections

In conjunction with the Federal Open Market Com-

mittee (FOMC) meeting held on December 16–17,

2014, meeting participants submitted their projec-

tions of the most likely outcomes for real output

growth, the unemployment rate, inflation, and the

federal funds rate for each year from 2014 to 2017

and over the longer run.

Each participant’s projec-

tion was based on information available at the time

of the meeting plus his or her assessment of appro-

priate monetary policy and assumptions about the

factors likely to affect economic outcomes. The

longer-run projections represent each participant’s

assessment of the value to which each variable would

be expected to converge, over time, under appropriate

monetary policy and in the absence of further shocks

to the economy. “Appropriate monetary policy” is

defined as the future path of policy that each partici-

pant deems most likely to foster outcomes for eco-

nomic activity and inflation that best satisfy his or

her individual interpretation of the Federal Reserve’s

objectives of maximum employment and stable

prices.

Overall, FOMC participants expected that, after a

slowdown in the first half of 2014, economic growth

under appropriate policy would be faster in the sec-

ond half of 2014 and over 2015 and 2016 than their

estimates of the U.S. economy’s longer-run normal

growth rate. On balance, participants then saw eco-

nomic growth moving back toward their assessments

of its longer-run pace in 2017 (

table 1 and figure 1).

Most participants projected that the unemployment

rate will continue to decline in 2015 and 2016, and all

participants projected that the unemployment rate

will be at or below their individual judgments of its

longer-run normal level by the end of 2016. All par-

ticipants projected that inflation, as measured by the

four-quarter change in the price index for personal

consumption expenditures (PCE), would rise gradu-

ally, on balance, over the next few years. Most partici-

pants saw inflation approaching the Committee’s

2 percent longer-run objective in 2016 and 2017.

While a few participants projected that inflation

would rise temporarily above 2 percent during the

forecast period, many others expected inflation to

remain low through 2017.

Participants judged that it would be appropriate to

begin raising the target range for the federal funds

rate over the projection period as labor market indi-

cators and inflation move back toward values the

Committee judges consistent with the attainment of

As discussed in its Policy Normalization Principles and Plans,

released on September 17, 2014, the Committee intends to tar-

get a range for the federal funds rate during normalization. Par-

ticipants were asked to provide, in their contributions to the

Summary of Economic Projections, either the midpoint of the

target range for the federal funds rate for any period when a

range was anticipated or the target level for the federal funds

rate, as appropriate. In the lower panel of figure 2, these values

have been rounded to the nearest ⅛ percentage point.

Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, December 2014

Percent

Variable

Central tendency

Range

2014 2015 2016 2017 Longer run 2014 2015 2016 2017 Longer run

Change in real GDP 2.3 to 2.4 2.6 to 3.0 2.5 to 3.0 2.3 to 2.5 2.0 to 2.3 2.3 to 2.5 2.1 to 3.2 2.1 to 3.0 2.0 to 2.7 1.8 to 2.7

September projection 2.0 to 2.2 2.6 to 3.0 2.6 to 2.9 2.3 to 2.5 2.0 to 2.3 1.8 to 2.3 2.1 to 3.2 2.1 to 3.0 2.0 to 2.6 1.8 to 2.6

Unemployment rate 5.8 5.2 to 5.3 5.0 to 5.2 4.9 to 5.3 5.2 to 5.5 5.7 to 5.8 5.0 to 5.5 4.9 to 5.4 4.7 to 5.7 5.0 to 5.8

September projection 5.9 to 6.0 5.4 to 5.6 5.1 to 5.4 4.9 to 5.3 5.2 to 5.5 5.7 to 6.1 5.2 to 5.7 4.9 to 5.6 4.7 to 5.8 5.0 to 6.0

PCE inflation 1.2 to 1.3 1.0 to 1.6 1.7 to 2.0 1.8 to 2.0 2.0 1.2 to 1.6 1.0 to 2.2 1.6 to 2.1 1.8 to 2.2 2.0

September projection 1.5 to 1.7 1.6 to 1.9 1.7 to 2.0 1.9 to 2.0 2.0 1.5 to 1.8 1.5 to 2.4 1.6 to 2.1 1.7 to 2.2 2.0

Core PCE inflation

1.5 to 1.6 1.5 to 1.8 1.7 to 2.0 1.8 to 2.0 1.5 to 1.6 1.5 to 2.2 1.6 to 2.1 1.8 to 2.2

September projection 1.5 to 1.6 1.6 to 1.9 1.8 to 2.0 1.9 to 2.0 1.5 to 1.8 1.6 to 2.4 1.7 to 2.2 1.8 to 2.2

Note: Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are percent changes from the fourth quarter of the previous year

to the fourth quarter of the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index for personal consumption

expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth

quarter of the year indicated. Each participant’s projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each

participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the

economy. The September projections were made in conjunction with the meeting of the Federal Open Market Committee on September 16–17, 2014.

The central tendency excludes the three highest and three lowest projections for each variable in each year.

The range for a variable in a given year includes all participants’ projections, from lowest to highest, for that variable in that year.

Longer-run projections for core PCE inflation are not collected.

272 101st Annual Report | 2014

Figure 1. Central tendencies and ranges of economic projections, 2014–17 and over the longer run

Change in real GDP

Percent

2009 2010 2011 2012 2013 2014 2015 2016 2017 Longer

run

Central tendency of projections

Range of projections

Actual

Unemployment rate

2009 2010 2011 2012 2013 2014 2015 2016 2017 Longer

run

PCE ination

2009 2010 2011 2012 2013 2014 2015 2016 2017 Longer

run

Core PCE ination

2009 2010 2011 2012 2013 2014 2015 2016 2017 Longer

run

Note: Definitions of variables are in the general note to table 1. The data for the actual values of the variables are annual.

Minutes of Federal Open Market Committee Meetings | December 273

its mandated objectives of maximum employment

and stable prices. As shown in

figure 2, all but a

couple of participants anticipated that it would be

appropriate to begin raising the target range for the

federal funds rate in 2015, with most projecting that

it will be appropriate to raise the target federal funds

rate fairly gradually.

Most participants viewed the uncertainty associated

with their outlooks for economic growth and the

unemployment rate as broadly similar to the average

level of the past 20 years. Most participants also

judged the level of uncertainty about inflation to be

broadly similar to the average level of the past

20 years, although a few participants viewed it as

higher. In addition, most participants continued to

see the risks to the outlook for economic growth and

for the unemployment rate as broadly balanced. A

majority saw the risks to inflation as broadly bal-

anced; however, a number of participants saw the

risks to inflation as weighted to the downside, while

one judged these risks as tilted to the upside.

The Outlook for Economic Activity

Participants projected that, conditional on their indi-

vidual assumptions about appropriate monetary

policy, growth in real gross domestic product (GDP)

would pick up from its low level in the first half of

2014 and run above their estimates of its longer-run

normal rate in the second half of 2014 and over 2015

and 2016. Participants pointed to a number of fac-

tors that they expected would contribute to stronger

real output growth, including improving labor mar-

ket conditions, lower energy prices, rising household

net worth, diminishing restraint from f iscal policy,

and highly accommodative monetary policy. On bal-

ance, participants saw real GDP growth moving back

toward, but remaining at or somewhat above, its

longer-run rate in 2017 as monetary policy adjusts

appropriately.

In general, participants’ revisions to their forecasts

for real GDP growth relative to their projections for

the September meeting were modest. However, all

participants revised up their projections of real GDP

growth somewhat for 2014, with a number of them

noting that recent data releases regarding real eco-

nomic activity had been stronger than anticipated.

The central tendencies of participants’ current pro-

jections for real GDP growth were 2.3 to 2.4 percent

in 2014, 2.6 to 3.0 percent in 2015, 2.5 to 3.0 percent

in 2016, and 2.3 to 2.5 percent in 2017. The central

tendency of the projections of real GDP growth over

the longer run was 2.0 to 2.3 percent, unchanged

from September.

All participants projected that the unemployment

rate will decline, on balance, through 2016, and all

participants projected that, by the end of that year,

the unemployment rate will be at or below their indi-

vidual judgments of its longer-run normal level. The

central tendencies of participants’ forecasts for the

unemployment rate in the fourth quarter of each

year were 5.8 percent in 2014, 5.2 to 5.3 percent in

2015, 5.0 to 5.2 percent in 2016, and 4.9 to 5.3 per-

cent in 2017. Almost all participants’ projected paths

for the unemployment rate shifted down slightly

through 2015 compared with their projections in Sep-

tember; many participants noted that recent data

pointing to improving labor market conditions were

an important factor underlying the downward revi-

sions in their unemployment rate forecasts. The cen-

tral tendency of participants’ estimates of the longer-

run normal rate of unemployment that would prevail

under appropriate monetary policy and in the

absence of further shocks to the economy was

unchanged at 5.2 to 5.5 percent; the range of these

estimates was 5.0 to 5.8 percent, down slightly from

5.0 to 6.0 percent in September.

Figures 3.A and 3.B show that participants held a

range of views regarding the likely outcomes for real

GDP growth and the unemployment rate through

2017. Some of the diversity of views reflected their

individual assessments of the effects of lower oil

prices on consumer spending and business invest-

ment, of the rate at which the forces that have been

restraining the pace of the economic recovery would

continue to abate, of the trajectory for growth in con-

sumption as labor market slack diminishes, and of

the appropriate path of monetary policy. Relative to

September, the dispersion of participants’ projections

for real GDP growth was little changed from 2015 to

2017, while for the unemployment rate, the disper-

sion was a bit narrower.

The Outlook for Inflation

Compared with September, the central tendencies of

participants’ projections for PCE inflation under the

assumption of appropriate monetary policy moved

down for 2014 and 2015 but were largely unchanged

for 2016 and 2017. In commenting on the changes to

their projections, many participants indicated that

the significant decline in energy prices and the appre-

ciation of the dollar since the Committee’s Septem-

ber meeting likely will put temporary downward

274 101st Annual Report | 2014

Figure 2. Overview of FOMC participants’ assessments of appropriate monetary policy

Appropriate timing of policy rming

Number of participants

2015 2016

Percent

Appropriate pace of policy rming: Midpoint of target range or target level for the federal funds rate

0.5

1.5

2.5

3.5

4.5

2014 2015 2016 2017 Longer run

Note: In the upper panel, the height of each bar denotes the number of FOMC participants who judge that, under appropriate monetary policy, the first increase in the target

range for the federal funds rate from its current range of 0 to ¼ percent will occur in the specified calendar year. In September 2014, the numbers of FOMC participants who

judged that the first increase in the target federal funds rate would occur in 2014, 2015, and 2016 were, respectively, 1, 14, and 2. In the lower panel, each shaded circle indi-

cates the value (rounded to the nearest ⅛ percentage point) of an individual participant’s judgment of the midpoint of the appropriate target range for the federal funds rate or

the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run.

Minutes of Federal Open Market Committee Meetings | December 275

Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2014–17 and over the longer run

2014

Number of participants

1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2

- - - - - - - -

1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3

Percent range

December projections

September projections

2015

1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2

- - - - - - - -

1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3

2016

1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2

- - - - - - - -

1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3

2017

1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2

- - - - - - - -

1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3

Longer run

1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2

- - - - - - - -

1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3

Note: Definitions of variables are in the general note to table 1.

276 101st Annual Report | 2014

Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2014–17 and over the longer run

2014

Number of participants

4.6 4.8 5.0 5.2 5.4 5.6 5.8 6.0

- - - - - - - -

4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1

Percent range

December projections

September projections

2015

4.6 4.8 5.0 5.2 5.4 5.6 5.8 6.0

- - - - - - - -

4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1

2016

4.6 4.8 5.0 5.2 5.4 5.6 5.8 6.0

- - - - - - - -

4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1

2017

4.6 4.8 5.0 5.2 5.4 5.6 5.8 6.0

- - - - - - - -

4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1

Longer run

4.6 4.8 5.0 5.2 5.4 5.6 5.8 6.0

- - - - - - - -

4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1

Note: Definitions of variables are in the general note to table 1.

Minutes of Federal Open Market Committee Meetings | December 277

pressure on inflation. The central tendencies of par-

ticipants’ projections for core PCE inflation moved

down somewhat for 2015 but were mostly unchanged

in other years. Almost all participants projected that

PCE inflation would rise gradually, on balance, over

the period from 2015 to 2017, reaching a level at or

near the Committee’s 2 percent objective. A few par-

ticipants expected PCE inflation to rise slightly above

2 percent at some point during the forecast period,

while many others expected inflation to remain below

2 percent for the entire period. The central tendencies

for PCE inflation were 1.2 to 1.3 percent in 2014,

1.0 to 1.6 percent in 2015, 1.7 to 2.0 percent in 2016,

and 1.8 to 2.0 percent in 2017. The central tendencies

of the forecasts for core inflation were higher than

those for the headline measure in 2014 and 2015,

reflecting the effects of lower oil prices. The central

tendencies of the two measures were equal in 2016

and in 2017. Factors cited by participants as likely to

contribute to a gradual rise of inflation toward the

Committee’s longer-run objective of 2 percent

included stable longer-term inflation expectations,

steadily diminishing resource slack, a pickup in wage

growth, waning effects of declines in oil prices, and

still-accommodative monetary policy.

Figures 3.C and 3.D provide information on the

diversity of participants’ views about the outlook for

inflation. In addition to moving lower, the range of

participants’ projections for PCE inflation in 2015

widened somewhat relative to September, likely

reflecting in part differences in participants’ assess-

ments of the effects of the recent decline in energy

prices on the outlook for inflation. The ranges for

core inflation narrowed in 2014 and 2015. In other

years of the projection, the ranges of the inflation

projections were relatively little changed. The range

for both measures in 2017 continued to show a very

substantial concentration near the Committee’s

2 percent longer-run objective by that time.

Appropriate Monetary Policy

Participants judged that it would be appropriate to

begin raising the target range for the federal funds

rate over the projection period as labor market indi-

cators and inflation move back toward values the

Committee judges consistent with the attainment of

its mandated objectives of maximum employment

and price stability. As shown in

figure 2, all but two

participants anticipated that it would be appropriate

to begin raising the target range for the federal funds

rate during 2015. However, most projected that the

appropriate level of the federal funds rate would

remain considerably below its longer-run normal

level through 2016. Most participants expected the

appropriate level of the federal funds rate would be

near, or already would have reached, their individual

view of its longer-run normal level by the end of

2017.

All participants projected that the unemployment

rate would be at or below 5.5 percent at the end of

the year in which they judged the initial increase in

the target range for the federal funds rate would be

warranted, and all but one anticipated that inflation

would be at or below the Committee’s 2 percent goal

at the end of that year. Most participants projected

that the unemployment rate would be at or somewhat

above their estimates of its longer-run normal level at

that time.

Figure 3.E provides the distribution of participants’

judgments regarding the appropriate level of the tar-

get federal funds rate, conditional on their assess-

ments of the economic outlook, at the end of each

calendar year from 2014 to 2017 and over the longer

run. All participants judged that economic condi-

tions would warrant maintaining the current excep-

tionally low level of the federal funds rate into 2015.

The median values of the federal funds rate at the

end of 2015 and 2016 fell 25 basis points and 38 basis

points relative to September, to 1.13 percent and

2.50 percent, respectively, while the mean values fell

15 basis points for both years, to 1.13 percent in 2015

and 2.54 percent in 2016. The dispersion of the pro-

jections for the appropriate level of the federal funds

rate was narrower in 2014 and 2015 and was little

changed in 2016 and 2017. Most participants judged

that it would be appropriate to set the federal funds

rate at or near its longer-run normal level in 2017,

although a number of them projected that the federal

funds rate would still need to be set appreciably

below its longer-run normal level at that time and

one anticipated that it would be appropriate to target

a level noticeably above its longer-run normal level.

Participants provided a number of reasons why they

thought it would be appropriate for the federal funds

rate to remain below its longer-run normal level for

some time after inflation and the unemployment rate

were near mandate-consistent levels. These reasons

included an assessment that the headwinds that have

been holding back the recovery will continue to exert

some restraint on economic activity at that time, that

residual slack in the labor market will still be evident

in other measures of labor utilization, and that the

risks to the economic outlook are asymmetric as a

result of the constraints on monetary policy associ-

278 101st Annual Report | 2014

Figure 3.C. Distribution of participants’ projections for PCE inflation, 2014–17 and over the longer run

2014

Number of participants

0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3

- - - - - - - -

1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range

December projections

September projections

2015

0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3

- - - - - - - -

1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4

2016

0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3

- - - - - - - -

1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4

2017

0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3

- - - - - - - -

1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4

Longer run

0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3

- - - - - - - -

1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4

Note: Definitions of variables are in the general note to table 1.

Minutes of Federal Open Market Committee Meetings | December 279

Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2014–17

2014

Number of participants

1.5 1.7 1.9 2.1 2.3

- - - - -

1.6 1.8 2.0 2.2 2.4

Percent range

December projections

September projections

2015

1.5 1.7 1.9 2.1 2.3

- - - - -

1.6 1.8 2.0 2.2 2.4

2016

1.5 1.7 1.9 2.1 2.3

- - - - -

1.6 1.8 2.0 2.2 2.4

2017

1.5 1.7 1.9 2.1 2.3

- - - - -

1.6 1.8 2.0 2.2 2.4

Note: Definitions of variables are in the general note to table 1.

280 101st Annual Report | 2014

Figure 3.E. Distribution of participants’ projections for the target federal funds rate, 2014–17 and over the longer run

2014

Number of participants

0.00 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13 4.38

- - - - - - - - - - - - - - - - - -

0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62

Percent range

December projections

September projections

2015

0.00 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13 4.38

- - - - - - - - - - - - - - - - - -

0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62

2016

0.00 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13 4.38

- - - - - - - - - - - - - - - - - -

0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62

2017

0.00 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13 4.38

- - - - - - - - - - - - - - - - - -

0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62

Longer run

0.00 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13 4.38

- - - - - - - - - - - - - - - - - -

0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62

Note: The target federal funds rate is measured as the level of the target rate at the end of the calendar year or in the longer run.

Minutes of Federal Open Market Committee Meetings | December 281

ated with the effective lower bound on the federal

funds rate.

As in September, estimates of the longer-run level of

the federal funds rate ranged from 3.25 to 4.25 per-

cent. All participants judged that inflation over the

longer run would be equal to the Committee’s infla-

tion objective of 2 percent, implying that their indi-

vidual judgments regarding the appropriate longer-

run level of the real federal funds rate in the absence

of further shocks to the economy ranged from

1.25 to 2.25 percent.

Participants’ views of the appropriate path for mon-

etary policy were informed by their judgments about

the state of the economy, including the values of the

unemployment rate and other labor market indica-

tors that would be consistent with maximum employ-

ment, the extent to which the economy was currently

falling short of maximum employment, the prospects

for inflation to return to the Committee’s longer-

term objective of 2 percent, the desire to minimize

potential disruption in f inancial markets by avoiding

unusually rapid increases in the federal funds rate,

and the balance of risks around the outlook. Some

participants also mentioned the prescriptions of vari-

ous monetary policy rules as factors they considered

in judging the appropriate path for the federal funds

rate.

Uncertainty and Risks

Nearly all participants continued to judge the levels

of uncertainty attending their projections for real

GDP growth and the unemployment rate as broadly

similar to the norms during the previous 20 years

(

figure 4).

Most participants continued to see the

risks to their outlooks for real GDP growth as

broadly balanced. A few participants viewed the risks

to real GDP growth as weighted to the downside; one

viewed the risks as weighted to the upside. Those par-

ticipants who viewed the risks as weighted to the

downside cited, for example, concern about the lim-

ited ability of monetary policy at the effective lower

bound to respond to further negative shocks to the

economy or about the trajectory for economic

growth abroad. As in September, nearly all partici-

pants judged the risks to the outlook for the unem-

ployment rate to be broadly balanced.

As in September, participants generally agreed that

the levels of uncertainty associated with their infla-

tion forecasts were broadly similar to historical

norms, and most saw the risks to those projections as

broadly balanced. A number of participants, how-

ever, viewed the risks to their inflation forecasts as

tilted to the downside; the reasons discussed included

the possibility that the recent low levels of inflation

could prove more persistent than anticipated; the

possibility that the upward pull on prices from infla-

tion expectations might be weaker than assumed; or

the judgment that, in current circumstances, it would

be difficult for the Committee to respond effectively

to low-inflation outcomes. Conversely, one partici-

pant saw upside risks to inflation, citing uncertainty

about the timing and efficacy of the Committee’s

withdrawal of monetary policy accommodation.

Table 2 provides estimates of the forecast uncertainty for the

change in real GDP, the unemployment rate, and total con-

sumer price inflation over the period from 1994 through 2013.

At the end of this summary, the box “

Forecast Uncertainty”

discusses the sources and interpretation of uncertainty in the

economic forecasts and explains the approach used to assess the

uncertainty and risks attending the participants’ projections.

Table 2. Average historical projection error ranges

Percentage points

Variable 2014 2015 2016 2017

Change in real GDP

±0.9 ±1.8 ±2.1 ±2.1

Unemployment rate

±0.2 ±0.8 ±1.4 ±1.8

Total consumer prices

±0.2 ±0.9 ±1.0 ±1.0

Note: Error ranges shown are measured as plus or minus the root mean squared

error of projections for 1994 through 2013 that were released in the winter by

various private and government forecasters. As described in the box “

Forecast

Uncertainty

,” under certain assumptions, there is about a 70 percent probability

that actual outcomes for real GDP, unemployment, and consumer prices will be in

ranges implied by the average size of projection errors made in the past. For more

information, see David Reifschneider and Peter Tulip (2007), “Gauging the

Uncertainty of the Economic Outlook from Historical Forecasting Errors,” Finance

and Economics Discussion Series 2007-60 (Washington: Board of Governors of

the Federal Reserve System, November), available at

www.federalreserve.gov/

pubs/feds/2007/200760/200760abs.html

; and Board of Governors of the Federal

Reserve System, Division of Research and Statistics (2014), “Updated Historical

Forecast Errors,” memorandum, April 9,

www.federalreserve.gov/foia/files/

20140409-historical-forecast-errors.pdf

Definitions of variables are in the general note to table 1.

Measure is the overall consumer price index, the price measure that has been

most widely used in government and private economic forecasts. Projection

is percent change, fourth quarter of the previous year to the fourth quarter of

the year indicated.

282 101st Annual Report | 2014

Figure 4. Uncertainty and risks in economic projections

Uncertainty about GDP growth

Number of participants

Lower

Broadly Higher

similar

December projections

September projections

Uncertainty about the unemployment rate

Broadly Higher

similar

Uncertainty about PCE ination

Broadly Higher

similar

Uncertainty about core PCE ination

Broadly Higher

similar

Risks to GDP growth

Number of participants

Number of participants Number of participants

Weighted to Broadly

downside

Weighted to

downside

Weighted to

downside

Weighted to Weighted to

Weighted to

downside

balanced upside

December projections

September projections

Risks to the unemployment rate

Broadly

balanced upside

Risks to PCE ination

Broadly

balanced upside

Risks to core PCE ination

Broadly

balanced upside

Note: For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.” Definitions of variables are in the general note to table 1.

Minutes of Federal Open Market Committee Meetings | December 283

Forecast Uncertainty

The economic projections provided by the members

of the Board of Governors and the presidents of the

Federal Reserve Banks inform discussions of mon-

etary policy among policymakers and can aid public

understanding of the basis for policy actions. Con-

siderable uncertainty attends these projections, how-

ever. The economic and statistical models and rela-

tionships used to help produce economic forecasts

are necessarily imperfect descriptions of the real

world, and the future path of the economy can be

affected by myriad unforeseen developments and

events. Thus, in setting the stance of monetary

policy, participants consider not only what appears to

be the most likely economic outcome as embodied in

their projections, but also the range of alternative

possibilities, the likelihood of their occurring, and the

potential costs to the economy should they occur.

Table 2 summarizes the average historical accuracy

of a range of forecasts, including those reported in

past Monetary Policy Reports and those prepared by

the Federal Reserve Board’s staff in advance of

meetings of the Federal Open Market Committee.

The projection error ranges shown in the table illus-

trate the considerable uncertainty associated with

economic forecasts. For example, suppose a partici-

pant projects that real gross domestic product (GDP)

and total consumer prices will rise steadily at annual

rates of, respectively, 3 percent and 2 percent. If the

uncertainty attending those projections is similar to

that experienced in the past and the risks around the

projections are broadly balanced, the numbers

reported in table 2 would imply a probability of about

70 percent that actual GDP would expand within a

range of 2.1 to 3.9 percent in the current year, 1.2 to

4.8 percent in the second year, and 0.9 to 5.1 percent

in the third and fourth years. The corresponding

70 percent confidence intervals for overall inflation

would be 1.8 to 2.2 percent in the current year, 1.1 to

2.9 percent in the second year, and 1.0 to 3.0 percent

in the third and fourth years.

Because current conditions may differ from those

that prevailed, on average, over history, participants

provide judgments as to whether the uncertainty

attached to their projections of each variable is

greater than, smaller than, or broadly similar to typi-

cal levels of forecast uncertainty in the past, as

shown in table 2. Participants also provide judgments

as to whether the risks to their projections are

weighted to the upside, are weighted to the down-

side, or are broadly balanced. That is, participants

judge whether each variable is more likely to be

above or below their projections of the most likely

outcome. These judgments about the uncertainty

and the risks attending each participant’s projections

are distinct from the diversity of participants’ views

about the most likely outcomes. Forecast uncertainty

is concerned with the risks associated with a particu-

lar projection rather than with divergences across a

number of different projections.

As with real activity and inflation, the outlook for the

future path of the federal funds rate is subject to con-

siderable uncertainty. This uncertainty arises primarily

because each participant’s assessment of the appro-

priate stance of monetary policy depends importantly

on the evolution of real activity and inflation over

time. If economic conditions evolve in an unexpected

manner, then assessments of the appropriate setting

of the federal funds rate would change from that

point forward.

284 101st Annual Report | 2014

Litigation

During 2014, the Board of Governors was a party in

6 lawsuits or appeals filed that year and was a party

in 14 other cases pending from previous years, for a

total of 20 cases. In 2013, the Board had been a party

in a total of 29 cases. As of December 31, 2014, 13

cases were pending.

Ramey v. Board of Governors, No. 14-cv-220 (D.D.C.,

filed December 22, 2014), is a Freedom of Informa-

tion Act case.

The Loan Syndications and Trading Association v.

Board of Governors, No. 14-1240 (D.C. Circuit, peti-

tion for review filed November 10, 2014), is a chal-

lenge to the credit risk retention rules issued under

section 941 of the Dodd-Frank Wall Street Reform

and Consumer Protection Act of 2010.

Richardson v. Board of Governors, No. 14-cv-01673

(D. District of Columbia, filed October 8, 2014), is

an employment discrimination claim.

Nobles v. Federal Reserve Bank of Atlanta and Board

of Governors, No. 14-cv-02541 (N.D. Georgia, filed

August 6, 2014), was a discrimination claim brought

by former employee of the Federal Reserve Bank of

Atlanta. On October 27, 2014, the plaintiff volun-

tarily dismissed the Board as a defendant in the

action.

Community Financial Services Association of

America, Ltd., v. Board of Governors, No. 14-cv-

00853 (D. District of Columbia, filed June 11, 2014),

is a challenge to actions of the Board, the Federal

Deposit Insurance Corporation, and the Off ice of the

Comptroller of the Currency that allegedly disadvan-

tage payday lenders.

Johnson v. Federal Reserve Board, No. 14-cv-50 (E.D.

North Carolina, filed March 28, 2014), was a com-

plaint by incarcerated individual that his prosecution

and imprisonment violated his rights under the

“redemption theory.” On January 30, 2015, the Dis-

trict Court granted the Board’s motion to dismiss the

action.

American Bankers Association, et al., v. Board of Gov-

ernors, No. 13-cv-02050 (D. District of Columbia,

filed December 24, 2013), was a challenge to a por-

tion of the so-called Volcker rule issued by the Board

and other regulators. On February 12, 2014, the

plaintiffs voluntarily dismissed the action.

American Bankers Association, et al., v. Board of Gov-

ernors, No. 13-1310 (D.C. Circuit, filed December 23,

2013), was a challenge to a portion of the so-called

Volcker rule issued by the Board and other regula-

tors. On February 12, 2014, the parties stipulated to a

dismissal of the petition for review.

Blair v. Bernanke, No. CJ-2013-3525, No. 14-CV-

00022 (N.D. Oklahoma, filed November 25, 2013),

was a third-party, pro se complaint originally filed in

Oklahoma state court alleging that the Board violated

the plaintiff’s constitutional rights through its regula-

tion of direct deposit payments. On July 14, 2014, the

District Court dismissed the action as to the Board.

Richter v. Board of Governors, No. 13-cv-015107 (D.

District of Columbia, filed October 1, 2013), was a

Freedom of Information Act case. On February 14,

2014, the District Court granted the Board’s motion

for summary judgment.

WMI Liquidating Trust v. Board of Governors,

No. 13-cv-01706 (W.D. Washington, filed Septem-

ber 20, 2013), is an action for a declaratory judgment

regarding golden parachute payments. On July 3,

2014, the action was transferred to the United States

Bankruptcy Court for the District of Delaware (Adv.

Pro. No. 14-50435-MFW (Bankr. D. Del.)).

NACS et al. v. Board of Governors, No. 13-5720 (D.C.

Circuit, notice of appeal filed August 21, 2013), was

an appeal from a District Court ruling invalidating

Board regulations issued pursuant to section 1075 of

the Dodd-Frank Wall Street Reform and Consumer

285

Protection Act relating to debit card interchange fees.

On March 21, 2014, the Court of Appeals reversed

the District Court’s grant of summary judgment and

remanded the action to the District Court. On Janu-

ary 20, 2015, the Supreme Court denied NACS’s peti-

tion for certiorari (No. 14-200).

State National Bank of Big Spring v. Bernanke,

No. 13-5247 (D.C. Circuit, notice of appeal filed

August 2, 2013), is an appeal of a District Court rul-

ing dismissing plaintiffs’ challenge to the constitu-

tionality of the Consumer Financial Protection

Bureau and the Financial Stability Oversight

Council.

Ferrer v. Bernanke, No. 13-29975 (S.D. Florida, filed

July 29, 2013), is an action alleging that plaintiffs

received improper relief under the Board’s and the

Office of the Comptroller of the Currency’s financial

remediation orders regarding deficient mortgage ser-

vicing and foreclosure practices. On October 28,

2014, the District Court granted the Board’s motion

to dismiss the action. On November 26, the plaintiffs

filed a notice of appeal to the Eleventh Circuit

(No. 14-15325).

Goldstein, Trustee v. Board of Governors, No. 13-MC-

00445-RC (D. District of Columbia, motion to com-

pel filed May 1, 2013), was a motion to compel pro-

duction of bank examination material. On Janu-

ary 17, 2014, the plaintiff voluntarily dismissed the

action.

Ball v. Board of Governors, No. 13-cv-00603 (D. Dis-

trict of Columbia, filed April 30, 2013), was a Free-

dom of Information Act case. On March 31, 2015,

the District Court granted the Board’s motion for

summary judgment.

Crisman v. Board of Governors et al., No. 12-cv-1871

(D. District of Columbia, filed November 19, 2012),

is a Freedom of Information Act case.

Wise v. Federal Reserve Board, No. 12-cv-1636 (D.

District of Columbia, filed October 2, 2012), is a

claim under the Federal Tort Claims Act.

CitiMortgage, Inc. v. Kokolis, No. 11-cv-2933-RBH

(D. South Carolina, filed in state court August 5,

2011; notice of removal filed October 27, 2011), was a

third-party complaint against the Board and the

United States Department of the Treasury by the

defendant in a mortgage foreclosure action. The Dis-

trict Court dismissed the action on May 30, 2012,

and on April 14, 2014, the Fourth Circuit Court of

Appeals dismissed the appeal on the appellant’s

motion (No. 12-1917).

Artis v. Greenspan, No. 01-cv-0400 (D. District of

Columbia, filed February 22, 2001), is an employ-

ment discrimination action. On September 29, 2014,

the District Court denied the plaintiffs’ motion for

class certification, and on January 15, 2015, the

Court of Appeals for the District of Columbia Cir-

cuit denied the plaintiffs’ petition for interlocutory

appeal of that denial (No. 14-8003).

286 101st Annual Report | 2014

Statistical Tables

Table 1. Federal Reserve open market transactions, 2014

Millions of dollars

Type of security

and transaction

Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Total

U.S. Treasury securities

Outright transactions

Treasury bills

Gross purchases 0 0 0 0 0 0 0 0 0 0 0 0 0

Gross sales 0 0 0 0 0 0 0 0 0 0 0 0 0

Exchanges 0 0 0 0 0 0 0 0 0 0 0 0 0

For new bills 0 0 0 0 0 0 0 0 0 0 0 0 0

Redemptions 0 0 0 0 0 0 0 0 0 0 0 0 0

Others within 1 year

Gross purchases 0 0 0 0 0 0 0 0 0 0 0 0 0

Gross sales 0 0 0 0 0 0 0 0 0 0 0 0 0

Exchanges 0 -295 0 0 0 -37 -40 0 -5 0 -88 0 -464

Redemptions 1 1 1 2 0 1 0 2 1 1 0 1 10

1 to 5 years

Gross purchases 2,477 8,790 3,738 6,688 3,224 5,711 3,790 2,965 3,210 2,161 0 0 42,754

Gross sales 0 0 0 0 0 0 0 0 0 0 0 0 0

Exchanges 0 90 0 0 0 12 14 0 1 0 35 0 152

5 to 10 years

Gross purchases 20,474 19,593 19,662 13,731 13,415 11,291 9,203 7,255 6,770 4,578 0 0 125,972

Gross sales 0 0 0 0 0 0 0 0 0 0 0 0 0

Exchanges 0 180 0 0 0 25 21 0 3 0 0 0 228

More than 10 years

Gross purchases 13,019 10,349 12,296 9,716 7,064 8,318 6,280 6,154 4,757 3,262 0 0 81,215

Gross sales 0 0 0 0 0 0 0 0 0 0 0 0 0

Exchanges 0 25 0 0 0 0 5 0 0 0 53 0 84

All maturities

Gross purchases 35,970 38,732 35,696 30,135 23,703 25,320 19,273 16,374 14,737 10,001 0 0 249,941

Gross sales 0 0 0 0 0 0 0 0 0 0 0 0 0

Redemptions 1 1 1 2 0 1 0 2 1 1 0 1 10

Net change in U.S.

Treasury

securities 35,969 38,731 35,695 30,133 23,703 25,319 19,273 16,372 14,736 10,000 0 -1 249,931

Federal agency obligations

Outright transactions

Gross purchases 0 0 0 0 0 0 0 0 0 0 0 0 0

Gross sales 0 0 0 0 0 0 0 0 0 0 0 0 0

Redemptions 2,310 3,500 4,068 2,378 883 423 1,532 565 1,556 306 1,023 0 18,544

Net change in federal

agency obligations -2,310 -3,500 -4,068 -2,378 -883 -423 -1,532 -565 -1,556 -306 -1,023 0 -18,544

Mortgage-backed securities

Net settlements

Net change in

mortgage-backed

securities 42,066 37,866 33,014 28,767 16,108 15,917 10,463 3,949 18,112 21,471 11,906 7,031 246,671

(continued on next page)

287

Table 1.—continued

Type of security

and transaction

Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Total

Temporary transactions

Repurchase agreements

Gross purchases 0 0 0 0 0 0 0 0 0 0 0 0 0

Gross sales 0 0 0 0 0 0 0 0 0 0 0 0 0

Reverse repurchase agreements

Gross purchases 3,888,403 3,793,139 3,714,026 4,734,608 6,327,094 4,466,710 5,185,940 5,094,880 5,542,761 5,626,645 4,219,033 4,087,951 56,681,190

Gross sales 3,776,234 3,805,923 3,838,511 4,719,082 6,278,279 4,646,528 4,996,369 5,105,118 5,675,723 5,512,078 4,200,731 4,320,526 56,875,104

Net change in

temporary

transactions 112,169 -12,784 -124,485 15,525 48,815 -179,818 189,571 -10,239 -132,962 114,567 18,301 -232,575 -193,913

Total net change in

System Open Market

Account 187,894 60,313 -59,844 72,048 87,743 -139,005 217,775 9,518 -101,670 145,732 29,185 -225,544 284,144

Note: Sales, redemptions, and negative figures reduce holdings of the System Open Market Account; all other figures increase such holdings. Components may not sum to totals

because of rounding. Please reference table 2 of the H.4.1 release (

www.federalreserve.gov/releases/h41/) for the maturity distribution of the securities.

Transactions exclude changes in compensation for the effects of inflation on the principal of inflation-indexed securities. Transactions include the rollover of inflation

compensation into new securities.

Excludes the effect of temporary transactions—repurchase agreements and reverse repurchase agreements.

Guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Monthly net change in the remaining principal balance of the securities, reported at face value.

Cash value of agreements, which are collateralized by U.S. Treasury securities, federal agency debt securities, and mortgage-backed securities.

288 101st Annual Report | 2014

Table 2. Federal Reserve Bank holdings of U.S. Treasury and federal agency securities, December 31, 2012–14

Millions of dollars

Description

December 31 Change

2014 2013 2012 2013 to 2014 2012 to 2013

U.S. Treasury securities

Held outright

2,461,363 2,208,775 1,666,145 252,588 542,630

By remaining maturity

Bills

1–90 days 0 0 0 0 0

91 days to 1 year 0 0 0 0 0

Notes and bonds

1 year or less 3,520 474 21 3,046 453

More than 1 year through 5 years 1,112,927 763,329 378,476 349,598 384,853

More than 5 years through 10 years 686,627 864,700 862,410 -178,073 2,290

More than 10 years 658,289 580,272 425,238 78,017 155,034

By type

Bills 0 0 0 0 0

Notes 1,634,949 1,467,427 1,110,398 167,522 357,029

Bonds 826,414 741,348 555,747 85,066 185,601

Federal agency securities

Held outright

38,677 57,221 76,783 -18,544 -19,562

By remaining maturity

Discount notes

1–90 days 0 0 0 0 0

91 days to 1 year 0 0 0 0 0

Coupons

1 year or less 5,733 18,544 19,562 -12,811 -1,018

More than 1 year through 5 years 30,597 36,268 52,830 -5,671 -16,562

More than 5 years though 10 years 0 62 2,044 -62 -1,982

More than 10 years 2,347 2,347 2,347 0 0

By type

Discount notes 0 0 0 0 0

Coupons 38,677 57,221 76,783 -18,544 -19,562

By issuer

Federal Home Loan Mortgage Corporation 19,515 24,986 32,261 -5,471 -7,275

Federal National Mortgage Association 13,470 25,555 31,906 -12,085 -6,351

Federal Home Loan Banks 5,692 6,680 12,616 -988 -5,936

Mortgage-backed securities

Held outright

1,736,833 1,490,162 926,662 246,671 563,500

By remaining maturity

1 year or less 0 0 2 0 -2

More than 1 year through 5 years 13 5 1 8 4

More than 5 years though 10 years 6,453 2,549 2,365 3,904 184

More than 10 years 1,730,367 1,487,608 924,294 242,759 563,314

By issuer

Federal Home Loan Mortgage Corporation 501,914 426,311 292,155 75,603 134,156

Federal National Mortgage Association 886,716 774,689 503,696 112,027 270,993

Government National Mortgage Association 348,203 289,162 130,811 59,041 158,351

Temporary transactions

Repurchase agreements

0 0 0 0 0

Reverse repurchase agreements

509,837 315,924 107,188 193,913 208,736

Foreign official and international accounts 113,132 118,169 107,188 -5,037 10,981

Dealers 396,705 197,755 0 198,950 197,755

Note: Components may not sum to totals because of rounding.

Excludes the effect of temporary transactions—repurchase agreements and reverse repurchase agreements.

Guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae.

Cash value of agreements, which are collateralized by U.S. Treasury securities, federal agency debt securities, and mortgage-backed securities.

Statistical Tables 289

Table 3. Federal Reserve Bank interest rates on loans to

depository institutions, December 31, 2014

Percent

Reserve Bank

Primary

credit

Secondary

credit

Seasonal

credit

All banks 0.75 1.25 0.15

Note: For details on rate changes over the course of 2014, see the section on

discount rates in “

Record of Policy Actions of the Board of Governors.” Primary

credit is available for very short terms as a backup source of liquidity to

depository institutions that are in generally sound financial condition in the

judgment of the lending Federal Reserve Bank. Secondary credit is available in

appropriate circumstances to depository institutions that do not qualify for primary

credit. Seasonal credit is available to help relatively small depository institutions

meet regular seasonal needs for funds that arise from a clear pattern of

intra-yearly movements in their deposits and loans. The discount rate on seasonal

credit takes into account rates charged by market sources of funds and is

reestablished on the first business day of each two-week reserve maintenance

period.

Table 4. Reserve requirements of depository institutions,

December 31, 2014

Type of deposit

Requirements

Percentage

of deposits

Effective

date

Net transaction accounts

$0 million–$14.5 million

0 12/23/2014

More than

$14.5 million–$103.6 million

3 12/23/2014

More than $103.6 million 10 12/23/2014

Nonpersonal time deposits 0 12/27/1990

Eurocurrency liabilities 0 12/27/1990

Note: Required reserves must be held in the form of vault cash and, if vault cash

is insufficient, also in the form of a deposit with a Federal Reserve Bank. An

institution must hold that deposit directly with a Reserve Bank or with another

institution in a pass-through relationship. Reserve requirements are imposed on

commercial banks, savings banks, savings and loan associations, credit unions,

U.S. branches and agencies of foreign banks, Edge corporations, and agreement

corporations.

Total transaction accounts consist of demand deposits, automatic transfer

service (ATS) accounts, NOW accounts, share draft accounts, telephone or

preauthorized transfer accounts, ineligible acceptances, and affiliate-issued

obligations maturing in seven days or less. Net transaction accounts are total

transaction accounts less amounts due from other depository institutions and

less cash items in the process of collection.

For a more detailed description of these deposit types, see

Form FR 2900.

The amount of net transaction accounts subject to a reserve requirement ratio

of 0 percent (the “exemption amount”) is adjusted each year by statute. The

exemption amount is adjusted upward by 80 percent of the previous year’s

(June 30 to June 30) rate of increase in total reservable liabilities at all

depository institutions. No adjustment is made in the event of a decrease in

such liabilities.

The amount of net transaction accounts subject to a reserve requirement ratio

of 3 percent is the “low reserve tranche.” By statute, the upper limit of the low

reserve tranche is adjusted each year by 80 percent of the previous year’s

(June 30 to June 30) rate of increase or decrease in net transaction accounts

held by all depository institutions.

290 101st Annual Report | 2014

Table 5. Banking offices and banks affiliated with bank holding companies in the United States, December 31, 2013 and 2014

Type of office Total

Commercial banks

State-

chartered

savings

banks

Total

Member

Nonmember

Total National State

All banking offices

Banks

Number, Dec. 31, 2013 6,134 5,842 1,978 1,143 835 3,864 292

Changes during 2014

New banks 19 15 8 4 4 7 4

Banks converted into branches -225 -219 -83 -47 -36 -136 -6

Ceased banking operations

-42 -38 -14 -11 -3 -24 -4

Other

0 1 3 -33 36 -2 -1

Net change -248 -241 -86 -87 1 -155 -7

Number, Dec. 31, 2014 5,886 5,601 1,892 1,056 836 3,709 285

Branches and additional offices

Number, Dec. 31, 2013 83,977 81,275 57,958 43,828 14,130 23,317 2,702

Changes during 2014

New branches 1,369 1,253 724 541 183 529 116

Banks converted to branches 225 220 106 65 41 114 5

Discontinued

-2,171 -2,125 -1,584 -1,231 -353 -541 -46

Other

0 -3 61 -94 155 -64 3

Net change -577 -655 -693 -719 26 38 78

Number, Dec. 31, 2014 83,400 80,620 57,265 43,109 14,156 23,355 2,780

Banks affiliated with bank holding companies

Banks

Number, Dec. 31, 2013 5,014 4,886 1,741 1,000 741 3,145 128

Changes during 2014

BHC-affiliated new banks 54 50 19 9 10 31 4

Banks converted into branches -192 -189 -77 -45 -32 -112 -3

Ceased banking operations

-40 -39 -15 -12 -3 -24 -1

Other

0 0 1 -29 30 -1 0

Net change -178 -178 -72 -77 5 -106 0

Number, Dec. 31, 2014 4,836 4,708 1,669 923 746 3,039 128

Note: Includes banks, banking offices, and bank holding companies in U.S. territories and possessions (affiliated insular areas).

For purposes of this table, banks are entities that are defined as banks in the Bank Holding Company Act, as amended, which is implemented by Federal Reserve

Regulation Y. Generally, a bank is any institution that accepts demand deposits and is engaged in the business of making commercial loans or any institution that is defined

as an insured bank in section 3(h) of the FDIC Act.

Institutions that no longer meet the Regulation Y definition of a bank.

Interclass changes and sales of branches.

Statistical Tables 291

Table 6A. Reserves of depository institutions, Federal Reserve Bank credit, and related items,

year-end 1984–2014 and month-end 2014

Millions of dollars

Period

Factors supplying reserve funds

Federal Reserve Bank credit outstanding

Gold

stock

Special

drawing rights

certificate

account

Treasury

currency

outstanding

Securities

held

outright

Repurchase

agreements

Loans and

other credit

extensions

Float

Other Federal

Reserve

assets

Total

1984 167,612 2,015 3,577 833 12,347 186,384 11,096 4,618 16,418

1985 186,025 5,223 3,060 988 15,302 210,598 11,090 4,718 17,075

1986 205,454 16,005 1,565 1,261 17,475 241,760 11,084 5,018 17,567

1987 226,459 4,961 3,815 811 15,837 251,883 11,078 5,018 18,177

1988 240,628 6,861 2,170 1,286 18,803 269,748 11,060 5,018 18,799

1989 233,300 2,117 481 1,093 39,631 276,622 11,059 8,518 19,628

1990 241,431 18,354 190 2,222 39,897 302,091 11,058 10,018 20,402

1991 272,531 15,898 218 731 34,567 323,945 11,059 10,018 21,014

1992 300,423 8,094 675 3,253 30,020 342,464 11,056 8,018 21,447

1993 336,654 13,212 94 909 33,035 383,904 11,053 8,018 22,095

1994 368,156 10,590 223 -716 33,634 411,887 11,051 8,018 22,994

1995 380,831 13,862 135 107 33,303 428,239 11,050 10,168 24,003

1996 393,132 21,583 85 4,296 32,896 451,992 11,048 9,718 24,966

1997 431,420 23,840 2,035 719 31,452 489,466 11,047 9,200 25,543

1998 452,478 30,376 17 1,636 36,966 521,475 11,046 9,200 26,270

1999 478,144 140,640 233 -237 35,321 654,100 11,048 6,200 28,013

2000 511,833 43,375 110 901 36,467 592,686 11,046 2,200 31,643

2001 551,685 50,250 34 -23 37,658 639,604 11,045 2,200 33,017

2002 629,416 39,500 40 418 39,083 708,457 11,043 2,200 34,597

2003 666,665 43,750 62 -319 40,847 751,005 11,043 2,200 35,468

2004 717,819 33,000 43 925 42,219 794,007 11,045 2,200 36,434

2005 744,215 46,750 72 885 39,611 831,532 11,043 2,200 36,540

2006 778,915 40,750 67 -333 39,895 859,294 11,041 2,200 38,206

2007 740,611 46,500 72,636 -19 41,799 901,528 11,041 2,200 38,681

2008 495,629 80,000 1,605,848 -1,494 43,553 2,223,537 11,041 2,200 38,674

2009 1,844,838 0 281,095 -2,097 92,811 2,216,647 11,041 5,200 42,691

2010 2,161,094 0 138,311 -1,421 110,255 2,408,240 11,041 5,200 43,542

2011 2,605,124 0 144,098 -631 152,568 2,901,159 11,041 5,200 44,198

2012 2,669,589 0 11,867 -486 218,296 2,899,266 11,041 5,200 44,751

2013

3,756,158 0 2,177 -962 246,947 4,004,320 11,041 5,200 45,493

2014 4,236,873 0 3,351 -555 239,238 4,478,908 11,041 5,200 46,355

Jan 3,831,690 0 2,245 -347 250,614 4,084,202 11,041 5,200 45,608

Feb 3,904,796 0 2,330 -586 239,529 4,146,068 11,041 5,200 45,677

Mar 3,970,056 0 2,298 -546 244,177 4,215,985 11,041 5,200 45,749

Apr 4,027,112 0 2,252 -770 248,459 4,277,053 11,041 5,200 45,814

May 4,066,824 0 2,168 -529 240,205 4,308,668 11,041 5,200 45,894

Jun 4,108,135 0 2,167 -524 243,896 4,353,674 11,041 5,200 45,963

Jul 4,136,789 0 2,125 -593 248,462 4,386,783 11,041 5,200 46,049

Aug 4,156,865 0 2,156 -509 238,624 4,397,136 11,041 5,200 46,104

Sep 4,188,172 0 2,289 -915 241,330 4,430,876 11,041 5,200 46,171

Oct 4,219,162 0 1,870 -450 245,971 4,466,554 11,041 5,200 46,243

Nov 4,230,132 0 1,794 -837 236,638 4,467,727 11,041 5,200 46,299

Dec 4,236,873 0 3,351 -555 239,238 4,478,908 11,041 5,200 46,355

Note: Components may not sum to totals because of rounding.

Includes U.S. Treasury securities, federal agency debt securities, and mortgage-backed securities. U.S. Treasury securities and federal agency debt securities include

securities lent to dealers, which are fully collateralized by U.S. Treasury securities, federal agency securities, and other highly rated debt securities.

Cash value of agreements, which are collateralized by U.S. Treasury securities, federal agency debt securities, and agency mortgage-backed securities.

Refer to “Table 6B. Loans and other credit extensions, by type, year-end 1984–2014 and month-end 2014” for detail.

As of 2013, unamortized discounts on securities held outright are included as a component of Other Federal Reserve assets. Previously, they were included in Other Federal

Reserve liabilities and capital.

Includes currency and coin (other than gold) issued directly by the U.S. Treasury. The largest components are fractional and dollar coins. For details refer to “U.S. Currency

and Coin Outstanding and in Circulation,” Treasury Bulletin.

292 101st Annual Report | 2014

Table 6A.—continued

Period

Factors absorbing reserve funds

Reserve

balances

with Federal

Reserve

Banks

Currency in

circulation

Reverse

repurchase

agreements

Treasury

cash

holdings

Deposits with Federal Reserve Banks, other than reserve balances

Required

clearing

balances

Other Federal

Reserve

liabilities

and capital

4,10

Term

deposits

Treasury

general

account

Treasury

supplementary

financing

account

Foreign Other

1984 183,796 0 513 n/a 5,316 n/a 253 867 1,126 5,952 20,693

1985 197,488 0 550 n/a 9,351 n/a 480 1,041 1,490 5,940 27,141

1986 211,995 0 447 n/a 7,588 n/a 287 917 1,812 6,088 46,295

1987 230,205 0 454 n/a 5,313 n/a 244 1,027 1,687 7,129 40,097

1988 247,649 0 395 n/a 8,656 n/a 347 548 1,605 7,683 37,742

1989 260,456 0 450 n/a 6,217 n/a 589 1,298 1,618 8,486 36,713

1990 286,963 0 561 n/a 8,960 n/a 369 528 1,960 8,147 36,081

1991 307,756 0 636 n/a 17,697 n/a 968 1,869 3,946 8,113 25,051

1992 334,701 0 508 n/a 7,492 n/a 206 653 5,897 7,984 25,544

1993 365,271 0 377 n/a 14,809 n/a 386 636 6,332 9,292 27,967

1994 403,843 0 335 n/a 7,161 n/a 250 1,143 4,196 11,959 25,061

1995 424,244 0 270 n/a 5,979 n/a 386 2,113 5,167 12,342 22,960

1996 450,648 0 249 n/a 7,742 n/a 167 1,178 6,601 13,829 17,310

1997 482,327 0 225 n/a 5,444 n/a 457 1,171 6,684 15,500 23,447

1998 517,484 0 85 n/a 6,086 n/a 167 1,869 6,780 16,354 19,164

1999 628,359 0 109 n/a 28,402 n/a 71 1,644 7,481 17,256 16,039

2000 593,694 0 450 n/a 5,149 n/a 216 2,478 6,332 17,962 11,295

2001 643,301 0 425 n/a 6,645 n/a 61 1,356 8,525 17,083 8,469

2002 687,518 21,091 367 n/a 4,420 n/a 136 1,266 10,534 18,977 11,988

2003 724,187 25,652 321 n/a 5,723 n/a 162 995 11,829 19,793 11,054

2004 754,877 30,783 270 n/a 5,912 n/a 80 1,285 9,963 26,378 14,137

2005 794,014 30,505 202 n/a 4,573 n/a 83 2,144 8,651 30,466 10,678

2006 820,176 29,615 252 n/a 4,708 n/a 98 972 6,842 36,231 11,847

2007 828,938 43,985 259 n/a 16,120 n/a 96 1,830 6,614 41,622 13,986

2008 889,898 88,352 259 n/a 106,123 259,325 1,365 21,221 4,387 48,921 855,599

2009 928,249 77,732 239 n/a 186,632 5,001 2,411 35,262 3,020 63,219 973,814

2010 982,750 59,703 177 0 140,773 199,964 3,337 13,631 2,374 99,602 965,712

2011 1,075,820 99,900 128 0 85,737 0 125 64,909 2,480 72,766 1,559,731

2012 1,169,159 107,188 150 0 92,720 0 6,427 27,476 n/a 66,093 1,491,044

2013

1,241,228 315,924 234 0 162,399 0 7,970 26,181 n/a 63,049 2,249,070

2014 1,343,010 509,837 201 0 223,452 0 5,242 20,320 n/a 61,447 2,377,995

Jan 1,227,908 203,755 260 12,822 88,573 0 7,971 16,973 n/a 62,992 2,524,797

Feb 1,251,821 216,539 269 0 46,029 0 7,975 14,545 n/a 62,542 2,608,266

Mar 1,268,860 341,023 279 14,251 142,189 0 6,977 11,095 n/a 63,240 2,430,060

Apr 1,272,401 325,498 229 0 148,343 0 7,826 7,659 n/a 62,715 2,514,438

May 1,280,062 276,683 186 42,904 28,894 0 7,808 5,262 n/a 64,175 2,664,829

Jun 1,282,504 456,501 146 92,420 139,299 0 5,942 11,450 n/a 64,192 2,363,424

Jul 1,286,231 266,930 140 0 127,237 0 6,565 9,496 n/a 62,060 2,690,413

Aug 1,292,915 277,169 161 0 48,664 0 6,566 7,992 n/a 64,125 2,761,889

Sep 1,290,427 410,131 159 0 158,302 0 5,243 27,067 n/a 64,112 2,537,847

Oct 1,299,978 295,564 203 219,144 117,403 0 5,260 9,058 n/a 62,597 2,519,832

Nov 1,317,568 277,262 189 334,714 108,270 0 5,248 6,839 n/a 63,626 2,416,550

Dec 1,343,010 509,837 201 0 223,452 0 5,242 20,320 n/a 61,447 2,377,995

Cash value of agreements, which are collateralized by U.S. Treasury securities, federal agency debt securities, and agency mortgage-backed securities.

Coin and paper currency held by the Treasury.

As of 2014, includes desposits of designated financial market utilites.

Required clearing balances were discontinued in July 2012.

In 2010, includes funds from American International Group, Inc. asset dispositions, held as agent.

n/a Not applicable.

r Revised.

Statistical Tables 293

Table 6B. Loans and other credit extensions, by type, year-end 1984–2014 and month-end 2014

Millions of dollars

Period

Total loans

and other

credit

extensions

Term

auction

credit

Other loans Net portfolio holdings of

Preferred

interests

AIA/ALICO

LLCs

Central

bank

liquidity

swaps

Primary,

secondary,

and

seasonal

credit

Primary

dealer

and other

broker-

dealer

credit

AMLF

TALF

AIG

CPFF

LLC

MMIFF

LLC

Maiden

Lane

LLC

Maiden

Lane II

LLC

8,9

Maiden

Lane III

LLC

8,10

TALF

LLC

1984 3,577 n/a 3,577 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

1985 3,060 n/a 3,060 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

1986 1,565 n/a 1,565 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

1987 3,815 n/a 3,815 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

1988 2,170 n/a 2,170 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

1989 481 n/a 481 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

1990 190 n/a 190 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

1991 218 n/a 218 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

1992 675 n/a 675 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

1993 94 n/a 94 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

1994 223 n/a 223 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

1995 135 n/a 135 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

1996 85 n/a 85 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

1997 2,035 n/a 2,035 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

1998 17 n/a 17 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

1999 233 n/a 233 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

2000 110 n/a 110 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

2001 34 n/a 34 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

2002 40 n/a 40 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

2003 62 n/a 62 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

2004 43 n/a 43 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

2005 72 n/a 72 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

2006 67 n/a 67 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

2007 72,636 40,000 8,636 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 24,000

2008 1,605,848 450,219 93,791 37,404 23,765 n/a 38,914 334,102 0 27,023 20,117 26,785 n/a n/a 553,728

2009 281,095 75,918 20,700 0 0 47,532 22,184 14,064 n/a 26,701 15,659 22,661 298 25,106 10,272

2010 138,311 0 221 n/a n/a 24,703 19,953 n/a n/a 26,967 16,198 23,143 665 26,385 75

2011 144,098 0 196 n/a n/a 9,013 n/a n/a n/a 7,232 9,280 17,744 811 n/a 99,823

2012 11,867 0 70 n/a n/a 556 n/a n/a n/a 1,413 61 22 856 n/a 8,889

2013 2,177 0 74 n/a n/a 97 n/a n/a n/a 1,541 63 22 109 n/a 272

2014 3,351 0 145 n/a n/a n/a n/a n/a n/a 1,678 n/a n/a n/a n/a 1,528

(continued on next page)

294 101st Annual Report | 2014

Table 6B.—continued

Period

Total loans

and other

credit

extensions

Term

auction

credit

Other loans Net portfolio holdings of

Preferred

interests

AIA/ALICO

LLCs

Central

bank

liquidity

swaps

Primary,

secondary,

and

seasonal

credit

Primary

dealer

and other

broker-

dealer

credit

AMLF

TALF

AIG

CPFF

LLC

MMIFF

LLC

Maiden

Lane

LLC

Maiden

Lane II

LLC

8,9

Maiden

Lane III

LLC

8,10

TALF

LLC

2014, month-end

Jan 2,245 0 17 n/a n/a 96 n/a n/a n/a 1,579 63 22 108 n/a 359

Feb 2,330 0 4 n/a n/a 95 n/a n/a n/a 1,581 63 22 106 n/a 458

Mar 2,298 0 35 n/a n/a 82 n/a n/a n/a 1,584 63 22 105 n/a 407

Apr 2,252 0 40 n/a n/a 81 n/a n/a n/a 1,654 63 22 92 n/a 300

May 2,168 0 83 n/a n/a 79 n/a n/a n/a 1,656 63 22 91 n/a 174

Jun 2,167 0 164 n/a n/a 49 n/a n/a n/a 1,655 63 22 90 n/a 124

Jul 2,125 0 213 n/a n/a 34 n/a n/a n/a 1,658 63 22 60 n/a 75

Aug 2,156 0 253 n/a n/a 34 n/a n/a n/a 1,664 63 22 44 n/a 76

Sep 2,289 0 327 n/a n/a 14 n/a n/a n/a 1,664 0 0 44 n/a 240

Oct 1,870 0 166 n/a n/a n/a n/a n/a n/a 1,679 0 0 24 n/a 1

Nov 1,794 0 112 n/a n/a n/a n/a n/a n/a 1,681 n/a n/a n/a n/a 1

Dec 3,351 0 145 n/a n/a n/a n/a n/a n/a 1,678 n/a n/a n/a n/a 1,528

Note: Components may not sum to totals because of rounding.

Prior to 2003, category was “Adjustment, extended, and seasonal credit.”

Includes credit extended through the Primary Dealer Credit Facility (PDCF) and credit extended to certain other broker-dealers. The PDCF was dissolved in February 2010.

Includes credit extended through the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF). The AMLF was dissolved in February 2010.

Includes credit extended by the Federal Reserve Bank of New York (FRBNY) to eligible borrowers through the Term Asset-Backed Securities Loan Facility (TALF), net of

unamortized deferred administrative fees. The TALF was discontinued in June 2010, and the last loan repayment was received in October 2014.

Credit extended to American International Group, Inc. (AIG) includes outstanding principal and capitalized interest net of unamortized deferred commitment fees and

allowance for loan restructuring. Excludes credit extended to consolidated LLCs. Upon the closing of the AIG recapitalization plan in January 2011, the credit extended to AIG

by the FRBNY under the revolving credit facility was repaid in full.

Net portfolio holdings of Commercial Paper Funding Facility (CPFF) LLC. The CPFF was discontinued in February 2010.

Net portfolio holdings of Money Market Investor Funding Facility (MMIFF) LLC. The MMIFF was discontinued in October 2009.

Net portfolio holdings at fair value.

Maiden Lane II LLC was discontinued in November 2014.

Maiden Lane III LLC was discontinued in November 2014.

Net portfolio holdings of TALF LLC, a limited liability company formed to purchase and manage any asset-backed securities that might be surrendered by a TALF borrower or

otherwise claimed by the FRBNY in connection with its enforcement rights to the TALF collateral. TALF LLC was discontinued in November 2014.

Preferred interests in AIA Aurora LLC and ALICO Holdings LLC at book value. After the closing of the AIG recapitalization plan, the Federal Reserve was paid in full for its

preferred interests in the special purpose vehicles AIA Aurora LLC and ALICO Holdings LLC.

Dollar value of foreign currency held under these agreements valued at the exchange rate to be used when the foreign currency is returned to the foreign central bank. This

exchange rate equals the market exchange rate used when the foreign currency was acquired from the foreign central bank.

n/a Not applicable.

Statistical Tables 295

Table 6C. Reserves of depository institutions, Federal Reserve Bank credit, and related items, year-end 1918–1983

Millions of dollars

Period

Factors supplying reserve funds

Federal Reserve Bank credit outstanding

Gold

stock

Special

drawing

rights

certificate

account

Treasury

currency

outstanding

Securities

held

outright

Repurchase

agreements

Loans Float

All

other

Other

Federal

Reserve

assets

Total

1918 239 0 1,766 199 294 0 2,498 2,873 n/a 1,795

1919 300 0 2,215 201 575 0 3,292 2,707 n/a 1,707

1920 287 0 2,687 119 262 0 3,355 2,639 n/a 1,709

1921 234 0 1,144 40 146 0 1,563 3,373 n/a 1,842

1922 436 0 618 78 273 0 1,405 3,642 n/a 1,958

1923 80 54 723 27 355 0 1,238 3,957 n/a 2,009

1924 536 4 320 52 390 0 1,302 4,212 n/a 2,025

1925 367 8 643 63 378 0 1,459 4,112 n/a 1,977

1926 312 3 637 45 384 0 1,381 4,205 n/a 1,991

1927 560 57 582 63 393 0 1,655 4,092 n/a 2,006

1928 197 31 1,056 24 500 0 1,809 3,854 n/a 2,012

1929 488 23 632 34 405 0 1,583 3,997 n/a 2,022

1930 686 43 251 21 372 0 1,373 4,306 n/a 2,027

1931 775 42 638 20 378 0 1,853 4,173 n/a 2,035

1932 1,851 4 235 14 41 0 2,145 4,226 n/a 2,204

1933 2,435 2 98 15 137 0 2,688 4,036 n/a 2,303

1934 2,430 0 7 5 21 0 2,463 8,238 n/a 2,511

1935 2,430 1 5 12 38 0 2,486 10,125 n/a 2,476

1936 2,430 0 3 39 28 0 2,500 11,258 n/a 2,532

1937 2,564 0 10 19 19 0 2,612 12,760 n/a 2,637

1938 2,564 0 4 17 16 0 2,601 14,512 n/a 2,798

1939 2,484 0 7 91 11 0 2,593 17,644 n/a 2,963

1940 2,184 0 3 80 8 0 2,274 21,995 n/a 3,087

1941 2,254 0 3 94 10 0 2,361 22,737 n/a 3,247

1942 6,189 0 6 471 14 0 6,679 22,726 n/a 3,648

1943 11,543 0 5 681 10 0 12,239 21,938 n/a 4,094

1944 18,846 0 80 815 4 0 19,745 20,619 n/a 4,131

1945 24,262 0 249 578 2 0 25,091 20,065 n/a 4,339

1946 23,350 0 163 580 1 0 24,093 20,529 n/a 4,562

1947 22,559 0 85 535 1 0 23,181 22,754 n/a 4,562

1948 23,333 0 223 541 1 0 24,097 24,244 n/a 4,589

1949 18,885 0 78 534 2 0 19,499 24,427 n/a 4,598

1950 20,725 53 67 1,368 3 0 22,216 22,706 n/a 4,636

1951 23,605 196 19 1,184 5 0 25,009 22,695 n/a 4,709

1952 24,034 663 156 967 4 0 25,825 23,187 n/a 4,812

1953 25,318 598 28 935 2 0 26,880 22,030 n/a 4,894

1954 24,888 44 143 808 1 0 25,885 21,713 n/a 4,985

1955 24,391 394 108 1,585 29 0 26,507 21,690 n/a 5,008

1956 24,610 305 50 1,665 70 0 26,699 21,949 n/a 5,066

1957 23,719 519 55 1,424 66 0 25,784 22,781 n/a 5,146

1958 26,252 95 64 1,296 49 0 27,755 20,534 n/a 5,234

1959 26,607 41 458 1,590 75 0 28,771 19,456 n/a 5,311

1960 26,984 400 33 1,847 74 0 29,338 17,767 n/a 5,398

1961 28,722 159 130 2,300 51 0 31,362 16,889 n/a 5,585

1962 30,478 342 38 2,903 110 0 33,871 15,978 n/a 5,567

1963 33,582 11 63 2,600 162 0 36,418 15,513 n/a 5,578

1964 36,506 538 186 2,606 94 0 39,930 15,388 n/a 5,405

1965 40,478 290 137 2,248 187 0 43,340 13,733 n/a 5,575

1966 43,655 661 173 2,495 193 0 47,177 13,159 n/a 6,317

1967 48,980 170 141 2,576 164 0 52,031 11,982 n/a 6,784

(continued on next page)

296 101st Annual Report | 2014

Table 6C.—continued

Period

Factors supplying reserve funds

Federal Reserve Bank credit outstanding

Gold

stock

Special

drawing

rights

certificate

account

Treasury

currency

outstanding

Securities

held

outright

Repurchase

agreements

Loans Float

All

other

Other

Federal

Reserve

assets

Total

1968 52,937 0 186 3,443 58 0 56,624 10,367 n/a 6,795

1969 57,154 0 183 3,440 64 2,743 63,584 10,367 n/a 6,852

1970 62,142 0 335 4,261 57 1,123 67,918 10,732 400 7,147

1971 69,481 1,323 39 4,343 261 1,068 76,515 10,132 400 7,710

1972 71,119 111 1,981 3,974 106 1,260 78,551 10,410 400 8,313

1973 80,395 100 1,258 3,099 68 1,152 86,072 11,567 400 8,716

1974 84,760 954 299 2,001 999 3,195 92,208 11,652 400 9,253

1975 92,789 1,335 211 3,688 1,126 3,312 102,461 11,599 500 10,218

1976 100,062 4,031 25 2,601 991 3,182 110,892 11,598 1,200 10,810

1977 108,922 2,352 265 3,810 954 2,442 118,745 11,718 1,250 11,331

1978 117,374 1,217 1,174 6,432 587 4,543 131,327 11,671 1,300 11,831

1979 124,507 1,660 1,454 6,767 704 5,613 140,705 11,172 1,800 13,083

1980 128,038 2,554 1,809 4,467 776 8,739 146,383 11,160 2,518 13,427

1981 136,863 3,485 1,601 1,762 195 9,230 153,136 11,151 3,318 13,687

1982 144,544 4,293 717 2,735 1,480 9,890 163,659 11,148 4,618 13,786

1983 159,203 1,592 918 1,605 418 8,728 172,464 11,121 4,618 15,732

Note: For a description of figures and discussion of their significance, see Banking and Monetary Statistics, 1941–1970 (Board of Governors of the Federal Reserve System,

1976), pp. 507–23. Components may not sum to totals because of rounding.

In 1969 and thereafter, includes securities loaned—fully guaranteed by U.S. government securities pledged with Federal Reserve Banks—and excludes securities sold and

scheduled to be bought back under matched sale–purchase transactions. On September 29, 1971, and thereafter, includes federal agency issues bought outright.

On December 1, 1966, and thereafter, includes federal agency obligations held under repurchase agreements.

In 1960 and thereafter, figures reflect a minor change in concept; refer to Federal Reserve Bulletin, vol. 47 (February 1961), p. 164.

Principally acceptances and, until August 21, 1959, industrial loans, the authority for which expired on that date.

For the period before April 16, 1969, includes the total of Federal Reserve capital paid in, surplus, other capital accounts, and other liabilities and accrued dividends, less the

sum of bank premises and other assets, and is reported as ‘‘Other Federal Reserve accounts;” thereafter, ‘‘Other Federal Reserve assets’’ and ‘‘Other Federal Reserve

liabilities and capital’’ are shown separately.

Before January 30, 1934, includes gold held in Federal Reserve Banks and in circulation.

Includes currency and coin (other than gold) issued directly by the Treasury. The largest components are fractional and dollar coins. For details refer to ‘‘U.S. Currency and

Coin Outstanding and in Circulation,’’ Treasury Bulletin.

Statistical Tables 297

Table 6C. Reserves of depository institutions, Federal Reserve Bank credit, and related items, year-end 1918–1983—continued

Millions of dollars

Period

Factors absorbing reserve funds

Member bank reserves

Currency

circulation

Treasury

cash

holdings

Deposits with Federal Reserve Banks,

other than reserve balances

Other

Federal

Reserve

accounts

Required

clearing

balances

Other

Federal

Reserve

liabilities

and capital

Treasury Foreign Other

With

Federal

Reserve

Banks

Currency

and

coin

Required

Excess

11,12

1918 4,951 288 51 96 25 118 0 0 1,636 n/a 1,585 51

1919 5,091 385 31 73 28 208 0 0 1,890 n/a 1,822 68

1920 5,325 218 57 5 18 298 0 0 1,781 n/a n/a n/a

1921 4,403 214 96 12 15 285 0 0 1,753 n/a 1,654 99

1922 4,530 225 11 3 26 276 0 0 1,934 n/a n/a n/a

1923 4,757 213 38 4 19 275 0 0 1,898 n/a 1,884 14

1924 4,760 211 51 19 20 258 0 0 2,220 n/a 2,161 59

1925 4,817 203 16 8 21 272 0 0 2,212 n/a 2,256 -44

1926 4,808 201 17 46 19 293 0 0 2,194 n/a 2,250 -56

1927 4,716 208 18 5 21 301 0 0 2,487 n/a 2,424 63

1928 4,686 202 23 6 21 348 0 0 2,389 n/a 2,430 -41

1929 4,578 216 29 6 24 393 0 0 2,355 n/a 2,428 -73

1930 4,603 211 19 6 22 375 0 0 2,471 n/a 2,375 96

1931 5,360 222 54 79 31 354 0 0 1,961 n/a 1,994 -33

1932 5,388 272 8 19 24 355 0 0 2,509 n/a 1,933 576

1933 5,519 284 3 4 128 360 0 0 2,729 n/a 1,870 859

1934 5,536 3,029 121 20 169 241 0 0 4,096 n/a 2,282 1,814

1935 5,882 2,566 544 29 226 253 0 0 5,587 n/a 2,743 2,844

1936 6,543 2,376 244 99 160 261 0 0 6,606 n/a 4,622 1,984

1937 6,550 3,619 142 172 235 263 0 0 7,027 n/a 5,815 1,212

1938 6,856 2,706 923 199 242 260 0 0 8,724 n/a 5,519 3,205

1939 7,598 2,409 634 397 256 251 0 0 11,653 n/a 6,444 5,209

1940 8,732 2,213 368 1,133 599 284 0 0 14,026 n/a 7,411 6,615

1941 11,160 2,215 867 774 586 291 0 0 12,450 n/a 9,365 3,085

1942 15,410 2,193 799 793 485 256 0 0 13,117 n/a 11,129 1,988

1943 20,449 2,303 579 1,360 356 339 0 0 12,886 n/a 11,650 1,236

1944 25,307 2,375 440 1,204 394 402 0 0 14,373 n/a 12,748 1,625

1945 28,515 2,287 977 862 446 495 0 0 15,915 n/a 14,457 1,458

1946 28,952 2,272 393 508 314 607 0 0 16,139 n/a 15,577 562

1947 28,868 1,336 870 392 569 563 0 0 17,899 n/a 16,400 1,499

1948 28,224 1,325 1123 642 547 590 0 0 20,479 n/a 19,277 1,202

1949 27,600 1,312 821 767 750 706 0 0 16,568 n/a 15,550 1,018

1950 27,741 1,293 668 895 565 714 0 0 17,681 n/a 16,509 1,172

1951 29,206 1,270 247 526 363 746 0 0 20,056 n/a 19,667 389

1952 30,433 1,270 389 550 455 777 0 0 19,950 n/a 20,520 -570

1953 30,781 761 346 423 493 839 0 0 20,160 n/a 19,397 763

1954 30,509 796 563 490 441 907 0 0 18,876 n/a 18,618 258

1955 31,158 767 394 402 554 925 0 0 19,005 n/a 18,903 102

1956 31,790 775 441 322 426 901 0 0 19,059 n/a 19,089 -30

1957 31,834 761 481 356 246 998 0 0 19,034 n/a 19,091 -57

1958 32,193 683 358 272 391 1,122 0 0 18,504 n/a 18,574 -70

1959 32,591 391 504 345 694 841 0 0 18,174 310 18,619 -135

1960 32,869 377 485 217 533 941 0 0 17,081 2,544 18,988 637

1961 33,918 422 465 279 320 1,044 0 0 17,387 2,823 20,114 96

1962 35,338 380 597 247 393 1,007 0 0 17,454 3,262 20,071 645

1963 37,692 361 880 171 291 1,065 0 0 17,049 4,099 20,677 471

1964 39,619 612 820 229 321 1,036 0 0 18,086 4,151 21,663 574

1965 42,056 760 668 150 355 211 0 0 18,447 4,163 22,848 -238

1966 44,663 1,176 416 174 588 -147 0 0 19,779 4,310 24,321 -232

1967 47,226 1,344 1,123 135 653 -773 0 0 21,092 4,631 25,905 -182

(continued on next page)

298 101st Annual Report | 2014

Table 6C.—continued

Period

Factors absorbing reserve funds

Member bank reserves

Currency

circulation

Treasury

cash

holdings

Deposits with Federal Reserve Banks,

other than reserve balances

Other

Federal

Reserve

accounts

Required

clearing

balances

Other

Federal

Reserve

liabilities

and capital

Treasury Foreign Other

With

Federal

Reserve

Banks

Currency

and

coin

Required

Excess

11,12

1968 50,961 695 703 216 747 -1,353 0 0 21,818 4,921 27,439 -700

1969 53,950 596 1,312 134 807 0 0 1,919 22,085 5,187 28,173 -901

1970 57,093 431 1,156 148 1,233 0 0 1,986 24,150 5,423 30,033 -460

1971 61,068 460 2,020 294 999 0 0 2,131 27,788 5,743 32,496 1,035

1972 66,516 345 1,855 325 840 0 0 2,143 25,647 6,216 32,044 98

1973 72,497 317 2,542 251 1,149

0 0 2,669 27,060 6,781 35,268 -1,360

1974 79,743 185 3,113 418 1,275

0 0 2,935 25,843 7,370 37,011 -3,798

1975 86,547 483 7,285 353 1,090 0 0 2,968 26,052 8,036 35,197 -1,103

1976 93,717 460 10,393 352 1,357 0 0 3,063 25,158 8,628 35,461 -1,535

1977 103,811 392 7,114 379 1,187 0 0 3,292 26,870 9,421 37,615 -1,265

1978 114,645 240 4,196 368 1,256 0 0 4,275 31,152 10,538 42,694 -893

1979 125,600 494 4,075 429 1,412 0 0 4,957 29,792 11,429 44,217 -2,835

1980 136,829 441 3,062 411 617 0 0 4,671 27,456 13,654 40,558 675

1981 144,774 443 4,301 505 781 0 117 5,261 25,111 15,576 42,145 -1,442

1982 154,908 429 5,033 328 1,033 0 436 4,990 26,053 16,666 41,391 1,328

1983 171,935 479 3,661 191 851 0 1,013 5,392 20,413 17,821 39,179 -945

Coin and paper currency held by the Treasury, as well as any gold in excess of the gold certificates issued to the Reserve Bank.

In November 1979 and thereafter, includes reserves of member banks, Edge Act corporations, and U.S. agencies and branches of foreign banks. On November 13, 1980, and

thereafter, includes reserves of all depository institutions.

Between December 1, 1959, and November 23, 1960, part was allowed as reserves; thereafter, all was allowed.

Estimated through 1958. Before 1929, data were available only on call dates (in 1920 and 1922 the call date was December 29). Since September 12, 1968, the amount has

been based on close-of-business figures for the reserve period two weeks before the report date.

For the week ending November 15, 1972, and thereafter, includes $450 million of reserve deficiencies on which Federal Reserve Banks are allowed to waive penalties for a

transition period in connection with bank adaptation to Regulation J as amended, effective November 9, 1972. Allowable deficiencies are as follows (beginning with first

statement week of quarter, in millions): 1973—Q1, $279; Q2, $172; Q3, $112; Q4, $84; 1974—Q1, $67; Q2, $58. The transition period ended with the second quarter of

1974.

For the period before July 1973, includes certain deposits of domestic nonmember banks and foreign-owned banking institutions held with member banks and redeposited

in full with Federal Reserve Banks in connection with voluntary participation by nonmember institutions in the Federal Reserve System program of credit restraint. As of

December 12, 1974, the amount of voluntary nonmember bank and foreign-agency and branch deposits at Federal Reserve Banks that are associated with marginal

reserves is no longer reported. However, two amounts are reported: (1) deposits voluntarily held as reserves by agencies and branches of foreign banks operating in the

United States and (2) Eurodollar liabilities.

Adjusted to include waivers of penalties for reserve deficiencies, in accordance with change in Board policy, effective November 19, 1975.

n/a Not applicable.

Statistical Tables 299

Table 7. Principal assets and liabilities of insured commercial banks, by class of bank, June 30, 2014 and 2013

Millions of dollars, except as noted

Item Total

Member banks

Nonmember banks

Total National State

2014

Assets

Loans and investments 9,663,697 7,782,729 6,321,060 1,461,669 1,880,968

Loans, gross 6,848,106 5,389,059 4,422,865 966,194 1,459,047

Net 6,846,847 5,388,379 4,422,393 965,986 1,458,468

Investments 2,815,591 2,393,670 1,898,195 495,475 421,921

U.S. Treasury and

federal agency

securities 447,347 357,408 276,851 80,557 89,939

Other 2,368,244 2,036,262 1,621,344 414,918 331,982

Cash assets, total 1,493,844 1,344,453 1,028,672 315,781 149,391

Liabilities

Deposits, total 9,188,365 7,490,342 6,078,366 1,411,976 1,698,023

Interbank 179,462 156,755 122,672 34,083 22,707

Other transactions 1,581,682 1,306,779 926,377 380,402 274,903

Other nontransactions 7,427,221 6,026,808 5,029,317 997,491 1,400,413

Equity capital 1,571,665 1,308,480 1,078,546 229,934 263,185

Number of banks 5,713 1,935 1,109 826 3,778

2013

Assets

Loans and investments 9,172,509 7,391,004 6,030,012 1,360,992 1,781,505

Loans, gross 6,504,652 5,140,521 4,246,181 894,340 1,364,131

Net 6,503,474 5,139,883 4,245,745 894,138 1,363,591

Investments 2,667,857 2,250,483 1,783,831 466,652 417,374

U.S. Treasury and

federal agency

securities 359,076 270,899 196,797 74,102 88,177

Other 2,308,782 1,979,585 1,587,034 392,551 329,197

Cash assets, total 1,157,209 1,002,704 785,000 217,704 154,505

Liabilities

Deposits, total 8,525,996 6,910,667 5,660,131 1,250,536 1,615,329

Interbank 165,734 142,536 117,971 24,565 23,198

Other transactions 1,319,948 1,062,065 762,819 299,246 257,883

Other nontransactions 7,040,316 5,706,067 4,779,341 926,726 1,334,249

Equity capital 1,473,317 1,227,341 1,013,073 214,268 245,976

Number of banks 5,938 2,012 1,193 819 3,926

Note: Includes U.S.-insured commercial banks located in the United States but not U.S.-insured commercial banks operating in U.S. territories or possessions. Data are

domestic assets and liabilities (except for those components reported on a consolidated basis only). Components may not sum to totals because of rounding. Data for 2013

have been revised.

300 101st Annual Report | 2014

Table 8. Initial margin requirements

under Regulations T, U, and X

Percent of market value

Effective date

Margin

stocks

Convertible bonds

Short

sales,

T only

1934, Oct. 1 25–45 n/a n/a

1936, Feb. 1 25–55 n/a n/a

1936, Apr. 1 55 n/a n/a

1937, Nov. 1 40 n/a 50

1945, Feb. 5 50 n/a 50

1945, July 5 75 n/a 75

1946, Jan. 21 100 n/a 100

1947, Feb. 1 75 n/a 75

1949, Mar. 3 50 n/a 50

1951, Jan. 17 75 n/a 75

1953, Feb. 20 50 n/a 50

1955, Jan. 4 60 n/a 60

1955, Apr. 23 70 n/a 70

1958, Jan. 16 50 n/a 50

1958, Aug. 5 70 n/a 70

1958, Oct. 16 90 n/a 90

1960, July 28 70 n/a 70

1962, July 10 50 n/a 50

1963, Nov. 6 70 n/a 70

1968, Mar. 11 70 50 70

1968, June 8 80 60 80

1970, May 6 65 50 65

1971, Dec. 6 55 50 55

1972, Nov. 24 65 50 65

1974, Jan. 3 50 50 50

Note: These regulations, adopted by the Board of Governors pursuant to the

Securities Exchange Act of 1934, limit the amount of credit that may be extended

for the purpose of purchasing or carrying margin securities (as defined in the

regulations) when the loan is collateralized by such securities. The margin

requirement, expressed as a percentage, is the difference between the market

value of the securities being purchased or carried (100 percent) and the maximum

loan value of the collateral as prescribed by the Board. Regulation T was adopted

effective October 1, 1934; Regulation U, effective May 1, 1936; and Regulation X,

effective November 1, 1971. The former Regulation G, which was adopted

effective March 11, 1968, was merged into Regulation U, effective April 1, 1998.

From October 1, 1934, to October 31, 1937, the requirement was the margin

“customarily required” by the brokers and dealers.

n/a Not applicable.

Statistical Tables 301

Table 9A. Statement of condition of the Federal Reserve Banks, by Bank, December 31, 2014 and 2013

Millions of dollars

Item

Total Boston New York Philadelphia Cleveland Richmond

2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013

Assets

Gold certificates 11,037 11,037 352 391 4,125 3,925 338 397 464 512 824 856

Special drawing rights

certificates 5,200 5,200 196 196 1,818 1,818 210 210 237 237 412 412

Coin 1,873 1,955 30 35 79 82 122 123 120 130 307 335

Loans and securities

Primary, secondary,

and seasonal loans 145 74 11 0 4 10 7 0 0 0 1 1

Term Asset-Backed

Securities Loan

Facility

0 98 n/a n/a 0 98 n/a n/a n/a n/a n/a n/a

Treasury securities,

bought outright

2,461,363 2,208,775 49,789 57,757 1,510,695 1,224,856 58,967 63,998 53,740 56,410 137,567 137,343

Government-sponsored

enterprise debt

securities, bought

outright

38,677 57,221 782 1,496 23,739 31,731 927 1,658 844 1,461 2,162 3,558

Federal agency and

government-sponsored

enterprise

mortgage-backed

securities, bought

outright

1,736,833 1,490,162 35,133 38,966 1,066,005 826,356 41,609 43,176 37,921 38,057 97,073 92,659

Unamortized

premiums on

securities held

outright

206,835 208,610 4,184 5,455 126,948 115,682 4,955 6,043 4,516 5,329 11,560 12,972

Unamortized discounts

on securities held

outright

-18,394 -12,352 -372 -323 -11,290 -6,850 -441 -357 -402 -316 -1,028 -768

Total loans and

securities 4,425,459 3,952,588 89,527 103,351 2,716,101 2,191,883 106,024 114,518 96,619 100,941 247,335 245,765

Accrued interest

receivable - System

Open Market

Account 25,644 23,493 521 616 15,715 13,007 619 685 565 605 1,446 1,474

Net portfolio holdings

of consolidated

variable interest

entities

1,811 1,926 n/a n/a 1,811 1,926 n/a n/a n/a n/a n/a n/a

Foreign currency

denominated

investments

20,900 23,724 951 1,166 6,720 7,583 1,571 1,835 1,662 1,851 4,358 4,982

Central bank liquidity

swaps

1,528 272 70 13 491 87 115 21 122 21 319 57

Other SOMA assets 29 1 1 0 18 1 1 0 1 0 2 0

Other assets

Items in process of

collection 86 165 0 0 0 0 0 0 0 0 0 0

Bank premises 2,263 2,290 124 123 437 432 76 73 110 111 220 228

Deferred asset

(accrued liability)-

remittances to the

Treasury 667 0 -16 0 923 0 -7 0 5 0 -28 0

All other assets

1,277 1,498 66 64 341 580 43 43 45 42 244 247

Interdistrict settlement

account 0 0 49,233 6,796 -187,283 166,886 -4,108 -19,721 38,162 4,138 -3,289 -32,634

Total assets 4,497,774 4,024,149 141,055 112,751 2,561,296 2,388,210 105,004 98,184 138,112 108,588 252,150 221,722

Liabilities

Federal Reserve notes

outstanding 1,469,554 1,400,977 45,956 45,182 475,290 513,592 46,452 41,983 68,649 58,552 103,087 104,492

(continued on next page)

302 101st Annual Report | 2014

Table 9A.—continued

Item

Total Boston New York Philadelphia Cleveland Richmond

2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013

Less: Notes held by

Federal

Reserve Bank 170,829 203,057 4,688 9,988 56,971 38,515 4,940 5,920 7,811 5,080 11,152 8,774

Federal Reserve notes

outstanding, net 1,298,725 1,197,920 41,268 35,194 418,319 475,077 41,512 36,063 60,838 53,472 91,935 95,718

Securities sold under

agreements to

repurchase

509,837 315,924 10,313 8,261 312,919 175,193 12,214 9,154 11,132 8,068 28,495 19,645

Deposits

Depository institutions 2,377,996 2,249,070 86,758 66,567 1,560,513 1,518,974 47,897 48,568 61,513 42,425 118,097 94,182

Treasury, general

account 223,452 162,399 n/a n/a 223,452 162,399 n/a n/a n/a n/a n/a n/a

Foreign, official

accounts 5,242 7,970 2 2 5,214 7,943 3 3 3 3 8 8

Other

20,318 26,180 2 8 20,177 26,020 25 17 0 0 92 105

Total deposits 2,627,008 2,445,619 86,762 66,577 1,809,356 1,715,336 47,925 48,588 61,516 42,428 118,197 94,295

Other liabilities

Accrued remittances to

Treasury

0 4,791 0 87 0 3,328 0 84 0 84 0 192

Deferred credit items 641 1,127 0 0 3 0 0 0 0 3 0 0

Consolidated variable

interest entities

127 274 n/a n/a 127 274 n/a n/a n/a n/a n/a n/a

All other liabilities

4,292 3,480 120 130 2,156 1,312 159 159 170 157 409 400

Total liabilities 4,440,630 3,969,135 138,463 110,249 2,542,880 2,370,520 101,810 94,048 133,656 104,212 239,036 210,250

Capital accounts

Capital paid-in 28,572 27,507 1,296 1,251 9,208 8,845 1,597 2,068 2,228 2,188 6,557 5,736

Surplus (including

accumulated other

comprehensive loss) 28,572 27,507 1,296 1,251 9,208 8,845 1,597 2,068 2,228 2,188 6,557 5,736

Total liabilities and

capital accounts 4,497,774 4,024,149 141,055 112,751 2,561,296 2,388,210 105,004 98,184 138,112 108,588 252,150 221,722

Note: Components may not sum to totals because of rounding.

Measured at fair value. Amounts include $0 million and $1 million in unrealized gains as of December 31, 2014 and 2013, respectively.

Par value. Includes securities loaned—fully collateralized by U.S. Treasury securities, other investment-grade securities, and collateral eligible for tri-party repurchase

agreements pledged with Federal Reserve Banks.

The par amount shown is the remaining principal balance of the securities.

Reflects the premium or discount, which is the difference between the purchase price and the face value of the securities that has not been amortized. For U.S. Treasury and

Federal agency debt securities, amortization is on a straight-line basis. For mortgage-backed securities, amortization is on an effective-interest basis.

The FRBNY is the primary beneficiary of TALF LLC, Maiden Lane LLC, Maiden Lane II LLC, and Maiden Lane III LLC and, as a result, the accounts and results of operations of

these entities are included in the combined financial statements of the Federal Reserve Banks. For additional details, see section 6, “

Table 6. Key financial data for

consolidated variable interest entities

.”

Valued daily at market exchange rates.

Dollar value of foreign currency held under these agreements valued at the exchange rate to be used when the foreign currency is returned to the foreign central bank. This

exchange rate equals the market exchange rate used when the foreign currency was acquired from the foreign central bank.

Includes furniture and equipment and depository institution overdrafts.

Contract amount of agreements.

Includes deposits of government-sponsored enterprises, the Consumer Financial Protection Bureau, international organizations, and designated financial market utilities.

These deposits are primarily held by the FRBNY.

Represents the estimated weekly remittances to U.S. Treasury as interest on Federal Reserve notes or, in those cases where the Reserve Bank’s net earnings are not

sufficient to equate surplus to capital paid-in, the deferred asset for interest on Federal Reserve notes. The amounts on this line are calculated in accordance with Board of

Governors policy, which requires the Federal Reserve Banks to remit residual earnings to the U.S. Treasury as interest on Federal Reserve notes after providing for the costs

of operations, payment of dividends, and the amount necessary to equate surplus with capital paid-in.

The other beneficial interest holder related to the TALF LLC is the U.S. Treasury; to Maiden Lane LLC, it is JPMorgan Chase; and to Maiden Lane II and Maiden Lane III LLCs, it

is AIG.

Includes accrued benefit costs and cash collateral posted by counterparties under commitments to purchase and sell federal agency and GSE MBS.

n/a Not applicable.

Statistical Tables 303

Table 9A. Statement of condition of the Federal Reserve Banks, by Bank, December 31, 2014 and 2013—continued

Millions of dollars

Item

Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco

2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013

Assets

Gold certificates 1,349 1,421 706 792 278 310 173 190 291 309 880 728 1,257 1,206

Special drawing rights

certificates 654 654 424 424 150 150 90 90 153 153 282 282 574 574

Coin 208 238 279 285 23 19 45 48 152 152 188 178 320 332

Loans and securities

Primary, secondary,

and seasonal loans 5 6 30 18 0 3 48 27 31 9 0 0 8 0

Term Asset-Backed

Securities Loan

Facility

n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Treasury securities,

bought outright

136,063 146,726 100,599 119,354 30,359 35,540 15,084 20,960 32,422 41,788 74,998 85,772 261,080 218,271

Government-sponsored

enterprise debt

securities, bought

outright

2,138 3,801 1,581 3,092 477 921 237 543 510 1,083 1,179 2,222 4,103 5,655

Federal agency and

government-